August,11 2009

Private equity may prove to be a boon for the Muscat Securities Market (MSM), which has long suffered from a lack of liquidity and market capitalisation, despite the bourse boasting a regulator with an unparalleled reputation in the region and a secure state-of-the-art trading platform.

Pradeep Asrani, the general manager at Gulf Baader Capital Markets, a leading brokerage house in Oman, recently told OBG that many of the building blocks are there to create a top-class bourse in Oman.

"There is huge potential for the MSM to be a leading stock market in the region, but right now the market lacks enough investors, shares, trading instruments and overall activity to avoid extreme price swings - in market jargon, this means lack of liquidity," he said

Currently the MSM has 136 stocks, of which 50-55 are active on a daily basis. Trading is dominated by five stocks: Bank Muscat, Omantel, Raysut Cement, Galfar Engineering and Renaissance Services. These five accounted for just over 1bn in trading volume in the 12-month period from July 2008 to July 2009 - slightly more than 20% of the total trading volume of 4.6bn shares in the period.

The most obvious way to boost the market is to have more stocks trading. Oman's business leaders have historically been reluctant to list their companies and attend to the responsibilities inherent, such as regular public disclosures of company performance and management decisions, paying out dividends, and perhaps surrendering a measure of control to large-scale minority shareholders.

There were no initial public offerings (IPOs) expected in 2009, and 2008 brought just two small ones. In 2010 at least one major new entrant is coming in Nawras, a current competitor to Omantel in wireless telecommunications and future competitor in fixed-line services. Nawras' IPO was mandated by its licence, and must happen by 2010.

As of summer 2009 there were no other large-scale IPOs expected. Help could come from private equity. Pioneers in this area include Al Anwar Holdings and Oman Investment Corp., which was established in 2006. Oman Investment has been taking stakes in Omani firms with the intention of exiting those investments within five years, and through IPOs.

Tareq Al Mugheiry, the chief investment officer, told OBG that Oman Investment's first two divestments are due in 2010 or 2011. It is hoped that private equity will eventually provide a steady stream of smaller IPOs that will give the MSM more depth.

"Private equity in this part of the world is still not a major player, but the opportunities are there," Al Anwar Holding's CEO, Krishna Kumar Gupta, told OBG. Al Anwar focuses on the real estate, financial services, insurance and manufacturing sectors.

Al Mugheiry agrees. "Despite the current economic situation, I see plenty of opportunity in Oman. What people are seeing is that there is an opportunity now for a counter-cyclical investment strategy,'" he said.

The first of these IPOs is expected to be Gulf International Pipe Industry, which was in 2009 set to become the first mill for high-pressure steel pipes and casings in the region, with a capacity to produce pipes up to 24 inches wide. Oman Investment Corp. has a 30% stake in the company. A second divestment will be in Octal, a petrochemicals producer established in 2006 and specialising in PET (plastic) packaging products.

The most discussed method for increasing liquidity is adding more complex trading methods, such as margin trading, derivative-based securities, or short selling, in which an investor sells a stock without owning it first - on the condition that he later buy those shares to complete the other side of the trade. A short-seller believes a stock price is primed to drop in value and that he can profit from a lower buying price later.

"It is sometimes good for the market to have short trading because in times of a market rising high, it mitigates the risk and provides liquidity," Houssam Karbotli, the chief executive of Al Hosn Investments, told OBG. But opponents of opening the market to more complex trading options say that Oman's investors are not sophisticated enough to use them properly.

"Oman is not ready for derivatives but it is ready for margin trading, because the market is not very liquid and not highly capitalised,'" said Hassan Ali Jawad, the chief executive of United Securities, one of the sultanate's largest investment firms. Jawad told OBG more IPOs are needed, in part from government projects being privatised.

The MSM's leadership knows that the market can evolve into something more than a tiny outpost only if it can manage to get enough trading activity to attract major global money.

This task is a bit of a catch-22: to offer more stocks, the market needs more trading. But more stocks are not likely unless there is more trading activity.

For now, regulators and market administrators are taking small steps, waiting out the global economic instability, and hoping that added weight will soon come from both IPOs and the introduction of more financial instruments. In the meantime, private equity firms are leading the way to more IPOs.

Source: Oxford Business Group


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