After the Qatar Fifa World Cup comes to a close, attention is likely to shift away from the Middle East in a return to normality. Attracting global contention, the event has proven to be something of a controversial showcase of the region’s spiralling wealth.
For those involved in the financial markets, however, football’s biggest celebration was not the biggest news in the Middle East and North Africa region in 2022.
While IPO activity elsewhere around the world has ground to a screeching halt in what has been called the worst market anyone has ever seen (see separate article), in the Middle East deal flow has gone from strength to strength.
The region’s market bucked the global downturn in 2022 as money flowed into Saudi Arabia and the UAE, particularly following Russia’s ejection from MSCI’s flagship global indices in March.
With a strong capital markets agenda in both jurisdictions, an abundance of oil money during a global energy crisis and growing foreign ownership of stocks, barring any geopolitical disasters the momentum looks set to continue into 2023.
Stand out deals such as the listing of Saudi Aramco and Dewa have helped propel the region to the top of the EMEA rankings for the first time. As GlobalCapital wrote in August, the disparity between the IPO deal value within the EMEA region was glaring in 2022 when compared to previous years, and as year end approaches sentiment has only marginally changed in favour of the European markets because of Porsche’s blockbuster, data skewing listing.
As of November 18, the region has seen a whopping $20bn from 51, whereas Europe’s 154 IPOs only add up to $15.825bn in the same time frame. Remove Porsche from the equation, and Europe’s number falls to just $7.01bn.
Striking (black) gold
So, what has caused this disparity? Why, in a year that will go down in history as one of the most volatile in recent memory, has the Middle East’s IPO market done so well?
According to Christian Cabanne, head of central and eastern Europe, the Middle East and Africa ECM at Bank of America in London, it is a combination of factors.
“Higher energy prices have of course been helpful, but Saudi and the UAE have also enjoyed strong macroeconomic tailwinds and GDP growth,” he says. “Inflation is much lower there than it is in the US and Europe, so they have not faced the same issues, and they are both going through structural reforms to grow their economies, attract foreign capital and boost the inflow of talent.”
The region’s two largest economies have both taken drastic measures to facilitate offerings in their own markets, in terms of the ease of doing business and the ease of performing IPOs.
“If you put all that together, you create an environment that is very constructive,” says Cabanne.
The depth of the market can be seen clearly in the level of subscription to its largest IPOs. The Americana listing, for example, was oversubscribed 71 times in mid-November.
“There is a very constructive base of local investors in the UAE and Saudi who have deep pockets and are willing to participate in transactions, which certainly helps a lot, as can be seen by the phenomenal level of oversubscription on some of these IPOs,” says Cabanne. “Not all markets have that.”
Alex Watkins, co-head of EMEA ECM at JP Morgan in London agrees that it is a combination of positive factors that have made the region so attractive.
“It has been incredibly rosy in terms of the Middle Eastern market environment,” he says. “The oil price is high, the economies are very strong, and investors want to diversify away from other regions, including western Europe, China and other emerging markets that are becoming less attractive. Reflecting that, valuations have been very buoyant.
“Investors can see that there is a strong group of high quality companies in the region that is evaluating listings."
Christopher Laing, head of emerging markets ECM at HSBC in Dubai, tells GlobalCapital of his near 20 years working on IPOs in the region, and how things are more buoyant now than they have ever been.
“We had a boom in 2007/08, there was a huge amount of liquidity and lots of deals got done,” he says. “I did the Dubai Ports deal when I was at Deutsche Bank, and I didn’t think that would ever be topped, we had $60bn of demand for a $4.2bn deal, ‘this is the career highpoint,’ I thought. But this year, we did Dewa raising $6.1bn and it had well over $80bn of demand.”
“Dewa was an outlier, but there’s been a lot of big deals that have happened, obviously Americana at the moment, but other deals have happened not just in Dubai, but Abu Dhabi and of course, Saudi Arabia as well.”
More of the same
Whether this kind of environment will remain in the years ahead is uncertain, but the medium-term outlook is very good.
While 2022 has no doubt been excellent for the Middle Eastern equity markets, what is more important to banks, lawyers and investors alike is the outlook for 2023 and beyond. Observers are aligned in their thinking, with several telling GlobalCapital that the next 12-18 months should continue to be buoyant in the region for a variety of reasons.
According to Bank of America’s Cabanne there is room for optimism. The UAE and Saudi have both proven to be resilient and were mostly immune from what is happening in Ukraine. Local indices have had their share of volatility as well, even though they have sharply outperformed the global markets.
“We probably expect more of the same in 2023, unless there is a radical change in the macroeconomic environment or energy prices, and the sentiment turns,” he says. “Unless something like that happens, I expect the interest from investors to still be there and we should continue to see an elevated level of activity in 2023.”
Promising pipeline
Indeed, the pipeline looks promising. The government of Dubai is not even halfway through its privatisation programme, while in Abu Dhabi, state oil producer Adnoc is preparing to list more of its subsidiaries, including its logistics unit.
In Saudi Arabia, Saudi Aramco is working on an IPO of its vast oil trading division, and the government is understood to be working on a follow-on offering of shares in the state oil giant, which was listed in December 2019 via the biggest IPO in history.
Despite the positive outlook, there is need for caution. “They are still massively outperforming the US and other major equity market indices, but they are not completely immune from the external shocks and higher volatility,” says Cabanne.
In November, Ahmad Sharaf, chairman of the Dubai Mercantile Exchange, told attendees at an event in the city that he was aware of three companies wanting to come to market in the remainder of this year. In addition, he suggested that there are another six or seven already pencilled in for next year.
Kunal Desai, a fund manager for global emerging market equities at GIB Asset Management, says that his pipeline has been very successful this year and expects it to continue.
“One of the biggest hindrances, or constraints for this market has been the complexity of companies and the range of companies that are accessible for public investors,” he says. “That’s why that IPO roadmap is so important, because as liquidity improves, as the range of business models come on to the market, that will only increase interest.
“You’ve already seen a number of investment funds and hedge funds look to open up new offices in Dubai and the GCC. This is all part of that story.”
Until recently, the IPO pipeline in both the UAE and Saudi Arabia was largely dominated by state owned firms. This too has begun to change this year with a handful of private companies listing like school operator Taaleem and medical company Burjeel.
Laing at HSBC in London adds that there has also been a been a lot of defensive yield stories, with relatively less growth. “There are a lot more growth stories with much lower dividend yields and payouts planned for next year, so that will be refreshing,” he says. “We expect the momentum to carry on.
“Normally as an equity capital market bank when markets are good you tell clients that they need to get to the market next month or next quarter. At some stage, it’s not going to be quite as good, because it’s very good right now, so the risks must be to the downside, but I don’t see what’s going to trigger that in the near term.”
The regional economy, fundamentally, is very strong. “It is obviously dangerous to predict, but in the next 12-18 months the situation is very, very positive.”
New rules, new money
In 2019, an agreement was struck between the Saudi Tadawul and the Abu Dhabi Securities Exchange to allow and boost dual listings between exchanges in the two countries. While the flow of these deals has not yet taken off in earnest, it is expected that the additional capability will further encourage listings in the future.
Increasing foreign investment has also played a role in the development of the market. In October of 2019, the Saudi Arabian regulator — the Capital Market Authority (CMA) — announced a new set of rules to its listing regime which allowed foreign issuer entry to the stock markets.
In 2020, 100% foreign ownership of UAE onshore companies became possible, subject to an exclusion list of certain strategic sectors that includes energy and finance, that still need to be at least 51% owned by UAE nationals/entities.
“Many listed companies also have limits in their constitutional documents and, using FAB as an example, we increased our foreign ownership limit from 25% to 40%,” says David Johnson, head of legal markets at FAB.
In 2019, Saudi Arabia passed similar legislation designed to allow foreigners to invest more easily in the country.
Further, still
However, it would be remiss to assume that this ECM boom will continue unabated indefinitely. Most of the observers GlobalCapital that has discussed the subject with talk of a 12–18-month timeline but are hesitant to predict whether the markets will remain buoyant after that.
Another ECM lawyer in the region urges caution, assuming that the natural lag is likely to catch up with the Middle East. “We don’t operate in a different world to the rest of the world, so ultimately there will be some sort of collateral effect on the region, but there’s always a lag,” they say. “I don’t see it happening in the next six to nine months, but there is a possibility further down the line.”
“You’ve got to remember that the Middle East is a region where — not withstanding everyone’s desire to diversify away from oil — to some extent, the market is still very much dependent on the oil price, and the oil price is still not bad.”
The additional government influence that does not exist in the same way in other markets also plays an important role in helping to promote IPOs. There are several demands and requirements for government funding, whereas the IPO is a route to try and generate the revenue to be able to deploy it elsewhere.GC