Middle East week ahead: slow progress on development projects puts Kuwait stock market boom at risk

Kuwait's stock market boom could run out of steam if the government doesn't push ahead soon with long-delayed infrastructure projects aimed at diversifying the oil-reliant economy. Turnover on the Kuwait Stock Exchange has tripled from six months ago as reduced political unrest and an improved economic outlook have spurred hopes that mega-infrastructure projects will finally get off the ground.
The benchmark share index has risen 38 percent this year, driven by local retail investors mainly, with small cap stocks attracting the bulk of fund inflows. The weighted share index, a better gauge of blue chips, has gained around 11 percent this year.
"It seems like we have hot money coming into the market," said Fouad Abdulrahman Alhadlaq, deputy general manager at Al Dar Asset Management.
"Positive expectations towards the Kuwaiti economy and the market in particular are the main reasons pushing the index up. Irrespective of company financials, people have a belief, that the coming period will be positive for overall business." Investor confidence has improved since elections in December brought in lawmakers initially seen as more co-operative with the government, after years of tensions between parliament and government which held up investment and major economic reforms.
A more stable political climate has raised hopes that delayed projects such as a 30 billion dinar ($108 billion) economic development plan announced in late 2010 may now go ahead.
The plan includes building a new airport terminal, an oil refinery and hospitals, and is aimed at diversifying the economy and attracting foreign investment. Stock market turnover reached 169 million dinars on May 10, its highest daily level since September 2009, according to stock exchange data.
Market turnover in April, for individual and institutional investors, totalled 2.68 billion dinars ($9.36 billion) compared with just 921 million dinars in October.
But government projects need to start moving shortly or investors will lose faith in the government's ability to implement policy, analyst say.
The ministry of public works signed a 738 million dinar contract in November for the construction of the Sheikh Jaber Al-Sabah Bridge over Kuwait Bay. The government also awarded the contract for a 1,500 megawatt gas-fired power and seawater treatment plant. But there has been little movement on infrastructure projects since.
"The biggest risk in Kuwait was political tension but now things have changed," said Ali Adou, portfolio manager at The National Investor. "It's a government that's backed by the parliament. As investors, now we have to see implementation of projects that were delayed and are talked about again. That would trigger more fund flows into Kuwait."
Renewed political jitters this month when some cabinet members offered to resign had little impact on the stock market, suggesting investor confidence remains intact. Analysts said there might be a minor cabinet reshuffle but it shouldn't upset the new equilibrium.
"Stocks went up in expectation of better earnings. The market doesn't care about politics anymore as long as things are calm with the executive parliament and government," said Fouad Darwish, head of brokerage at Global Investment House.
A court ruling due next month could pose renewed risks for investors though.
The constitutional court is expected to rule on June 16 on an emergency decree issued by Kuwait's ruler last year, six weeks before the December poll, which changed the rules for voting and triggered some of the largest street protests in the country's history.
If the court rules that the decree was not constitutional, parliament will need to be dissolved, triggering a snap election. Legislation passed by the assembly may also be made invalid - sending Kuwait back to square one in economic policy terms, or close to it.
Analysts say the market still offers opportunities but investors need to be cautious. Institutional investors' participation in the market, subdued for several years due to political turmoil, is rising although trading by investors from Gulf Co-operation Council states remains low and some analysts say shares are now starting to look pricey, including banking shares. They account for more than half of the bourse's market capitalisation.
"Bank lending has been in the lower single digits and banking stocks overall are expensive due to the fact that they have been provisioning for the past three years for their exposure to investment firms," said Adou.
Banks own shares in investment firms and declines in share prices in recent years put pressure on banks' balance sheets. "Things may change if lending increases through the projects the government is planning to start," said Adou.
Some small-cap stocks are being driven higher despite weak fundamentals, raising concern that speculative traders are playing the market and such stocks could be vulnerable to sharp falls.
"I'm cautiously optimistic and believe it's a good time to invest selectively. Fundamentals are improving but there are some companies in distress," said Alhadlaq at Al Dar Asset Management.