GCC stock markets have suffered from a lack of liquidity periodically despite many measures and incentives that have been put up by the authorities and listing companies. This confirms that other factors that have led to the decline in trading volumes, and these need to be addressed to maintain the vital role stock exchanges play as the creator of assets.
One key issue relates to governance, as Gulf stock exchanges still lack in adequate legislation to rollback legacy rules that have put off investors. The lack of governance has led to a rise in the number of retail investors who have refrained from dealing in stocks after losing most of their savings in past transactions from a lack of market transparency and poor governance.
Feeding off insider info
The problem lies in the dominance of speculators who feed on selective leaks put out by managements of listed companies and without being held accountable for it. This happened after the big stock market crash of the mid-2000s and repeated just over six years ago. Their repercussions continue even now.
Which is why the Gulf’s stock markets require a comprehensive review of existing legislation and leading to their implementation in case of violations to restore investor confidence. The average monthly growth in market value of Gulf stock exchanges was only 2.1 per cent in August, according to the GCC Statistical Centre, compared to a 13 per cent rise for Nasdaq earlier this year.
The other factor is related to the structure of the Gulf stock markets, which consist mainly of listed banks, real estate and service companies. They remain underweight in industrial and tech firms. Banks and real estate sectors are affected almost instantly by various crises, local or from beyond, the most recent of which was the pandemic. This requires the listing of a broader mix of sectors and companies to contribute to market balance. Industrial companies can thus help Gulf stock markets, as already shown by the performance of listed subsidiaries of oil companies.
Greater transparency elsewhere
On the other hand, there are administrative procedures that put off investors, who find a more ready acceptance when playing in US or European markets. Stock markets contribute to the expansion and strengthening of the middle-class, which adds to the stability of a society.
According to Bloomberg, a shrinking middle-class prompted the government to work to ensure that 30 million Egyptians will join the middle-class by 2030. The previous crises that hit Gulf stock markets also contributed to shrinking this demographic after they lost their savings. This too added to the decline in liquidity.
Therefore, the recent measures taken by some Gulf markets to encourage and revitalize deal flows will not have significant effects in light of the continued weak governance and lack of transparency, disclosure and accountability. What is needed is support the structure of stock markets by encouraging joint ventures between the governments and the private sector, which still enjoy cash positions that do not find their way into domestic investments.
It is necessary to address these issues to attract the investments of savers and retail investors and do their bit in raising social stability in the GCC.
-- The writer is a specialist in energy and Gulf economic affairs.