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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 [1].  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 [2]. 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.

Attractive valuations

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.

 

 Index Price / Earnings Price / Book Earnings Per Share 1yr Dividend Yield YTD Performance Volatility (1yr S.D.)
FTSE Kuwait 11.97 1.37 117.58 4.59% -26.11% 28.42%
MSCI Saudi Arabia 15.92 1.44 78.16

4.76%

 
-22.52% 21.21%
MSCI EM 13.53 1.67 71.29 2.98% -13.42% 17.97%

 

Source: Bloomberg, HANetf, 11 Mar 2019 - 11 Mar 2020
Past performance is not an indicator of future performance

Should 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.

Some 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

 

Ticker Weight in Kuwait Basket

20 Jan 2016 PE (Brent at $27)

P/E today (Brent at $38)

Diff.

Est. Flows $mn

Est. Flows mn Shares

x ADV
NBK KK Equity 44.5% 11.9 13.2 11% 1268 492  70
KFH KK Equity** 33.0% 17.2 16.8 -2% 941 470 49
ZAIN KK Equity 8.9% 8.2 8.9 8% 254 173 32
AGLTY KK Equity 4.1% 8.7 9.7 11% 117 73 38
BOUBYAN KK Equity 4.0% 22.8 23.7 4% 113 69 66
GBK KK Equity 2.7% 15.6 9.2 -41% 77 116 22
MABANEE KK Equity 2.8% 14.3 11.1 -22% 80 42 49
Overall Basket 100.0% 13.8 14.1 2.5% 2850 - -


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 ETFs

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. 

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