Kuwait’s stock market had a remarkable performance at the start of this year, rising nearly 19% in the month of January alone.  The market has since pulled back by 1% in February.  Market analysts and insiders believe that the market is taking a break before resuming its rise.  Is the market on a longer-term sustained rally or is the current rally a repeat of the 2012-2013 rally?  The stock market index rose over 48% from November 2012 to May 2013 only to erase the entire gain slowly over the next two and a half years.

Source: Boursa Kuwait

Source: Boursa Kuwait

Many analysts believe that this time is different.  Here’s a recent article from Bloomberg:

Kuwaiti stocks have started the year with a charge, performing better than any other market in the world in January. Investors expect the positive momentum to continue.

The Kuwait Stock Exchange Index has risen 12 percent this year, more than double the advance in the MSCI Frontier Emerging Markets Index. There could be a further 20 percent to climb, according to Ali Adou, a money manager at the National Investor in Abu Dhabi, who oversees the firm’s $20 million fund focused on the Middle East and North Africa.

Kuwaiti stocks advanced for a 12th day Thursday, the longest winning streak since September 2014. The volume of stocks traded surged to the highest in more than 3 1/2 years.

Read the full story from Bloomberg.

Bloomberg cites six reason why this market rally is sustainable, they are;

  1. Market reforms: The Capital Market Authority (CMA) is in the process of implementing new reforms to boost market liquidity;
  2. Rising oil: The doubling of oil prices from the mid-$20s to the mid-$50s will greatly improve government finances and thus, spending;
  3. Sovereign wealth fund:  Kuwait Investment Authority (KIA) stated that it plans on managing more of its assets in-house, which many believe will translate into more investment in Kuwait;
  4. Frontier funds: Kuwait will face less competition for frontier market investment as Pakistan moves up to emerging market status;
  5. Real estate performance: Depressed local real estate markets pushed investors into other asset classes such as stocks;
  6. M&A activity:  Recent M&A activity, such as the $1.1 billion sale of Kuwait Food Co. (known as Americana) to UAE investors has given local investors a boost of confidence in the market.

While all of these reasons have merit, none of them fully explain why the stock market index and trading volume have jumped since the beginning of this year.  Last year (2016), was a muted year for the stock index as it mainly traded flat the entire year.  Low oil prices can be attributed to the fall in market since 2014, which also ended up dragging the real estate market down with it.

Source: Boursa Kuwait

There is also a misconception among analysts about Kuwaiti investors’ faith in the market regulator, the CMA and the sovereign wealth fund, the KIA.  The CMA is not viewed in high regard in Kuwait, mainly because of its cumbersome regulations without proper justification.  Since its inception in 2010, it has been known to implement new rules and regulations without proper mechanisms for financial institutions to follow or for the regulator to monitor.

The KIA’s recent announcement to manage up to 8% of its assets in-house from the current level of 1-2% has mislead investors in Kuwait to believe that this means the KIA will be allocating more to the local market.  This is not the case as the KIA’s Managing Director, Bader Al Saad, clearly stated that the plans were to move towards higher yielding (i.e. riskier) assets in order for the fund to generate higher returns.  There was no public statement made on increasing exposure to the local market.

The most likely reason for the rise in the market in 2017 can be attributed to an overall improvement in investor sentiment, many of whom have been disappointed with the market’s performance since its over 56% crash from June 2008 to March 2009.  The market is still far off from reaching the highs of 2008.  An earlier attempt at a sustained market rally was in 2013 as you can see from the chart above.  However, the rally was not sustainable and fell along with oil prices.  Today’s rally is no different.  Investor sentiment may have improved, but it will soon evaporate as we expect to see oil prices fall to the $30s or lower over the next 1-2 years.  The key driver behind the rise of investor sentiment, and the market, is the price of oil.