A report prepared by KAMCO Research that analyzes the performance of the Kuwait Stock Exchange during June 2010 in addition to assessing the latest key economic and market developments and their effect on the performance of the stock market.

Performance Review
The absence of new growth drives and lack of confidence in the market led investors to remain on the sidelines during the month, thereby resulting in low liquidity as value traded fell 23.1% to KWD 584 million. As a result, the KSE Weighted and KAMCO TRW Indices continued its previous month negative trend to shed 2.31% & 1.59% respectively during June. Led by the losses incurred on market heavyweights ZAIN and Agility, the market capitalization of the Services sector plunged 5.60% and weighed down on market performance during the month. Despite the announcement of finalizing the sale of its African operations for USD 10.7 billion to Bharti Airtel, market heavyweight ZAIN remained highly volatile during the month and witnessed its share price drop nearly 5.08% to KWD 1.120 after taking into account the price adjustment for its 2009 annual dividend of KD 0.170 per share. On the other hand, Agility witnessed its share price plunge nearly 19.23% (after taking into account the price adjustment for its 2009 annual dividend of KD 0.040 per share) to KWD 0.315 mainly over the new fraud accusation charges by the U.S federal prosecutors against the company. Losses incurred during the month pushed the KSE Weighted Index and KAMCO TRW Index YTD-10 gains to drop to 3.0% and 1.9% after recording 5.5% and 3.6% in May-10. However, irrespective of the drop in its YTD-10 gains, the KSE ended as the best performing market as compared to its peers in the GCC region for the same period.

Positive announcement by Standard & Poor (S&P) regarding the country’s sovereign credit ratings and outlook boosted investor sentiments as the KSE Weighted Index and KAMCO TRW Index gained 1.12% and 0.83% to close the first three trading sessions of the month on a positive note. Market heavyweight ZAIN’s announcement that it has concluded the sale of the its African assets to Bharti Airtel failed to boost investor sentiments as the second week of trade witnessed the KSE Weighted Index and KAMCO TRW Index shed 1.17% and 0.83% respectively. ZAIN had remained suspended for 11 days pending the distribution of its 2009 annual dividend and the stock was forecasted to rally on resumption of trading ahead of an expected dividend from the sale of its African operations. However, the firm’s announcement that the expected payout from its assets sale would not be made until 2011 dampened sentiments.

During the third week of trade, gains recorded by a majority of regional and international markets coupled with rising oil prices failed to boost investor sentiments as trading on the KSE remained weak. As a result, the KSE Weighted Index and KAMCO TRW Index incurred losses of 1.65% and 1.18% respectively. Led by losses incurred by market heavyweight Agility, which witnessed its share price drop 19% to KD 0.320, the KSE Weighted Index and KAMCO TRW Index during the last nine trading sessions of the month shed 0.62% and 0.41% respectively. During the same period, U.S federal prosecutors accused that Agility may still be overbilling the American government for military supplies.
During the month, international rating agency S&P said that it had affirmed its ‘AA- / A-1+’ sovereign credit ratings on Kuwait and that the Outlook is ‘Stable’. The ratings are supported by the sovereign’s rich resource endowment, which combined with prudent policies, has enabled the country to build very strong external and fiscal balance sheet positions in recent years. The Stable outlook on Kuwait balances the government’s strong fiscal position against elevated regional geopolitical risk, increased contingent liabilities and potential impediments to growth.

During June, market heavyweight ZAIN announced that it had satisfied all the required conditions precedent to closing of the sale of 100% of its African operations to Bharti Airtel and that the transaction values the company’s African portfolio at USD 10.7 billion on an enterprise basis. ZAIN also said that it had received USD 7.868 billion of cash proceeds from Bharti and is expected to receive an additional USD 400 million upon certain milestones being achieved over the next six months. The balance of USD 700 million is due one year from completion as per the original agreements signed on 30 March-2010. In fulfillment of its debts obligations, ZAIN announced that it has repaid the USD 4 billion Revolving Credit Facility which the company entered into July-06. On the other hand, ZAIN Saudi Arabia, in due course of the month announced that it is considering a capital reduction to cover some or all of its accumulated losses which reached USD 1.6 billion by end of March-2010. Over developments surrounding market heavyweight Agility during the month, U.S federal prosecutors said that Agility is a “fugitive from justice” that has defrauded the U.S military and does not have the right to bring a motion in the federal court. The federal prosecutors also said that it has evidence that the company may still be overbilling the U.S on military supplies and thereby implicating new fraud charges on the already troubled company.

The Banking sector which accounts for 36.9% of the total market capitalization gained 1.4% in its market value to KD 11.21 billion (USD 39.1 billion) compared to KD 11.05 billion (USD 38.6 billion) at the end of May-10. During the month, Kuwait Finance House (KFH) witnessed its share price drop 1% to KD 0.980. In due course of the month, the international rating agency Standard & Poor (S&P) announced that it has affirmed it’s long and short term counterparty credit ratings on KFH at ‘A- / A-2’. The outlook is “Negative”. The rating action reflects S&P’s views about KFH’s strong links and potential support from the State of Kuwait which mitigates the bank’s weakening asset quality and reduced revenue generating capability. The negative outlook reflects the view that the deteriorating asset quality and the bank’s rapid growth could weaken KFH’s financial profile further. On the other hand, the Commercial Bank of Kuwait (CBK) witnessed its share price surge 25.7% to KD 0.930 over investor expectations that the lender will post better than expected 1H-10 results.

The Investment sector which accounts for nearly 8.8% of the total market capitalization shed 7.5% to KD 2.67 billion (USD 9.3 billion) compared to KD 2.89 billion (USD 10.1 billion) in May-10. During the month, the Central Bank of Kuwait had set forth new guidelines with regards to the limits on Financial Leverage Ratio, Quick Ratio and Foreign liabilities exposure for investment companies. With regards to the Financial Leverage, the ratio of total liabilities to total equity should not exceed 2:1 while with the Quick Ratio; the ratio of liquid assets due within one month should not be less than 10% of total liabilities. As for the foreign liabilities exposure, the volume of foreign exposure should not be more than 50% of total equity. When further analyzing the investment sector’s financial leverage ratio, out of the 51 listed investment companies in the local stock market as of the end of March 2010, there are only 10 companies that do not comply with the new requirement due to higher leverage ratios than the 2.0x set by the Central Bank.

The law has given these companies a two year period, between June 2010 and 2012, in order to comply with the law which adds significant pressure on these companies to either pay off considerable portions of its debt or increase its equity through raising more capital, a choice that is considered impractical given such tough market conditions. As for the other 41 companies, even though it is in compliance with the new financial leverage requirement, obstacles still exist in light of the high ratio of short term debt obligation and the lack of sufficient liquidity.
Total market capitalization during the month dropped 2.3% to KD 30.3 billion (USD 105.9 billion) at the end of June, down from KD 31.1 billion (USD 108.4 billion) recorded at the end of May-10. The Real Estate sector shed nearly 5.4% to record KD 1.64 billion (USD 5.7 billion) while the Industrial sector dropped 3.9% to end at KD 2.56 billion (USD 8.9 billion). The Services sector incurred losses of 5.6% to KD 8.3 billion (USD 29.0 billion).