Why Trade a Kuwait ETF over Single Stock Equities? | KUW8
Why Trade a Kuwait ETF Over Single Stock Equities?
In recent weeks, we have seen increased
volatility across global markets due to the spread of the COVID-19 virus. On February 25th to 27th,
Kuwait celebrated its National Day and Liberation Day, a public holiday where
Kuwaitis celebrate their independence.
As financial markets were closed for the majority of that week in
Kuwait, local investors began to brace themselves for their local market to
play catch up with the rest of world markets and fall dramatically when Boursa
Kuwait re-opened on Sunday 1st March. Their fears were realized and the Kuwait market
closed down over 10% at the end of the day’s trading . This left many local Kuwaiti investors
exposed as they were unable to close positions during that week.
An Alternative to Waiting for the Market to Open
Investors in the KMEFIC FTSE Kuwait Equity UCITS ETF “KUW8” which is an exchange traded fund
(ETF) that tracks an index of large, mid and small cap securities trading on
the premier or main market of the Kuwait Stock Exchange had an
alternative. They had the option to
sell all or part of their Kuwait position at any point during the week ahead of
the large market fall of the end of the week.
This is because the Kuwait ETF is listed on European exchanges including
the LSE, Borsa Italiana and Deutsche Boerse and ETFs trade throughout the
market hours of the exchange of which they are listed and these hours are not
linked to local market opening times. In
the case of the KUW8 ETF, trading takes place from 8am until 4.35pm London
time, Monday through Friday.
Investors could even have grasped the
opportunity as a buyer on Sunday 1st March as Kuwait market sharply
corrected and gained 6% on the Monday . Similarly, to this situation there have been intraday halts
in the local Kuwait market caused by volatility in prices. In certain
instances, the market was open for such a small amount of time, executing
traders in a diversified basket of equites was extremely challenging.
The financial valuations of Kuwaiti stocks currently look
attractive compared to Saudi stocks and the wider EM peer group, suggesting
that it may be a good time to consider an allocation to Kuwaiti equities and
the benefits of investing in KUW8.
||Price / Earnings
||Price / Book
||Earnings Per Share
||1yr Dividend Yield
||Volatility (1yr S.D.)
Source: Bloomberg, HANetf, 11 Mar 2019 - 11 Mar 2020
Past performance is not an indicator of future performance
you invest in FTSE Kuwait now?
Kuwait looks like an interesting buying opportunity. It
hasn’t traded at these levels since mid-2018 and with the MSCI upgrade event on
the horizon, there will be forced buyers.
The market is trading near the 2016 trough valuation with ~
USD 3bn inflows expected on 28 May 2020.
Year-to-date performance of the Kuwait Premier TR index,
as at 11/03/2020
Source: Bloomberg. Past performance is not an indicator
of future performance.
Kuwaiti shares are already pricing in oil at sub $30/bbl
levels, so it’s compelling for a tactical or strategic investment.
key observations from “EFG Hermes”, a leading regional broker
- We see no risk to any of the names currently within the MSCI Kuwait provisional inclusion list, despite recent drop.
- FTSE Kuwait/ MSCI Kuwait are now 1-standard deviation below historical P/E and only 2.5% above 2016 trough P/E when Brent touched USD27/barrel.
- Kuwait premier Index now undeforming Tadawul YTD despite a) Kuwait having USD32/barrel* lower budget breakeven oil price b) Kuwait trading at 34% discount on P/E.
- NBK only 4% above 52-week low, the same applies to the rest of the basket on average.
- 5.31% MARB AUB/KFH (8.12% factoring in DPS). The merger will add c20% to KFH’s EPS on a FY consolidation.
- MABANEE FTSE inclusion COB 19 Mar: FTSE trackers are expected to buy 19.8mn shares (USD38mn, 23x ADVT).
- One last observation is that Index trades in MENA have underperformed YTD (EMIRATES underperformed MXAE, BSFR/ARNB underperformed MXSA, MABANEE underperformed MSCI/FTSE Kuwait, Kuwait underperformed Saudi Arabia), and this was particularly evident during this week’s session.
The main Kuwait basket vs 2016 trough valuation and
estimated May 2020 flows
in Kuwait Basket
Jan 2016 PE (Brent at $27)
today (Brent at $38)
Flows mn Shares
Potential Profit from Falling Markets
Furthermore, investors with a higher risk
appetite can short an ETF, which allows them to trade by essentially borrowing
the Kuwait ETF and sell short and make a potential profit from a falling
market, something that cannot be done with local Kuwait equities.
Benefits of accessing Kuwaiti equities via an
There are some significant advantages to trading ETFs over local equities which include:
- Being able to short the ETF
- Extended trading hours and trading through local holidays where the market is closed Liquidity of the secondary market
- Liquidity of the secondary market
For full details of the flexibility of ETFs over trading local equities, please download our full guide to "The Benefits of the ETF Structure For Accessing Kuwaiti Equities" here.
Disadvantages of ETFs:
Of course, like equities, an investor's capital is fully at risk and may not get the amount originally invested. Exchange rate fluctuations can also have both a positive and negative effect on returns.
Kuwait ETF "KUW8"
The KMEFIC FTSE Kuwait Equity UCITS ETF “KUW8”
provides targeted exposure to an emerging market. In a single trade, access a diverse basket of
Kuwaiti securities across market capitalization bands and industry sectors.
Article Date: 12th March 2020.