The Middle East is an IPO oasis in a desert of dried up deals
Immune to inflation and profiting from tensions between Russia and the West, the Gulf states offer investors refuge from the despair sweeping European IPO markets.
It seems counterintuitive to think of the Gulf as a safe haven from Europe's economic and political problems but as far as investors in IPOs are concerned, the Middle East could offer something of a respite from a harsh European winter.
Surging inflation, the prospect of rising interest rates and the threat of war between Russia and the West over Ukraine are growing problems for Europe and have been the backdrop to a number of failed IPOs.
This year to date, European IPOs have raised $3bn-equivalent, nearly 80% less than in the same period last year. The number of deals has also decreased from 44 to 34.
While issuers, bankers and investors from across Europe have been nervously eyeing the performance of the few IPO market survivors that began trading this week, equity markets in the Gulf are thriving.
In the Middle East, IPOs have raised $2.3bn so far — just about 3% less than in the same period last year. The number of deals has increased from two to 10.
The largest deal in the UAE, Abu Dhabi Ports Group, has traded up 5.3% since listing on February 7. Saudi software company Elm, the second largest deal in the region this year, is up 53% since the flotation on January 30.
Two factors are driving equity markets in the Gulf, especially Saudi Arabia and the UAE.
First, and most obviously, they benefit from rising oil prices, which the West's stand-off with Russia has only exacerbated. Brent Crude oil started the year at around $78 per barrel; as of Thursday it cost $93.23 per barrel.
Middle East economies are suffering far less when it comes to inflation too. Consumer prices in the Gulf Cooperation Council (GCC) states — the UAE, Saudi Arabia, Qatar, Oman, Kuwait, and Bahrain — increased by 2.1% in 2021, compared to around 5% in the eurozone.
The number is predicted to rise by 1.8% in 2022 whereas in the eurozone, the ECB is figuring out how to bring the measure down.
This is partly because the governments in the GCC handed out less money than usual during the pandemic than those in the Europe and the US.
There is also less of a labour shortage in the GCC. While the Kafala system that regulates the lives of cheap migrant workers in the Middle East raises concerns around human rights and equality, it also leads to lower inflation.
Domestic demand and that of specialist investors has driven GCC equity capital markets deals so far this year. But a wider range of international funds are slowly discovering the perks the region has to offer.
Saudi Arabia’s stock exchange Tadawul published data that shows that the share of qualified international investors in London with zero exposure to Saudi Arabia decreased from 80% to 72% between December 2021 and January 2022.
And with a strategic, long-term drive in the region to privatise state-owned assets in the quest to lower its reliance on oil revenues, there will be plenty of opportunities for investors to build their exposure there — especially while European markets prove so difficult to navigate.