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The collapse of Gulf equity markets two years ago virtually dried up the flow of initial public offerings (IPOs).
In recent months, however, there have been ample signs that the region is once again hungry for new issues.
Last week, Dubai-based contractor Drake & Scull's Dh1.22 billion IPO was 101 times oversubscribed, attracting some 45,600 investors. Although Drake's numbers are not anywhere near the past records in IPO oversubscriptions in the region - Aabar Petroleum was oversubscribed 800 times in March 2005 and Tamweel 484 times in July 2006 - it is a sign of strong investor appetite for IPOs.
Drake's strong show follows a long, dry spell in the primary market, where a number of regional firms had to shelve their IPOs due to poor valuations or a fear of devolvement.
Changing trend
The trend seems to be changing. The recent performance of some of the new listings is supportive of the growing demand for IPOs. The newly established Islamic lender Ajman Bank's shares have jumped more than 35 per cent since it started trading on Dubai's bourse in June, while shares of Islamic insurer Takaful Emarat soared 346 per cent upon their debut last week.
In fact, a steady revival in the regional IPO market is apparent from the number of recent issues across the Middle East, including the Gulf. Some 33 companies raised $8.69 billion by selling shares to the public in the first half of the year, a surge of 79.9 per cent from the same period last year, according to Ernst & Young.
Investment bankers estimate that there are more than 100 IPOs scheduled to hit the Gulf markets in the next 12 months, of which 55 are in Saudi Arabia and about 30 in the UAE.
The regional share price movements are also hinting at changing investor perception and growing appetite for regional equities. In the first half of 2008, equity markets in the Gulf (MSCI GCC ex-Saudi) rose by 3.2 per cent, outperforming the MSCI Emerging Market index, which slipped about 12.7 per cent.
Support from liquidity
While regional valuations are picking up, analysts see the Gulf markets having strong upward potential supported by the regional liquidity. As the macro backdrop remains excellent in the Middle East thanks to high oil prices, Merrill Lynch said last week the major downside risk is a potential collapse of oil prices.
However, it added that the impact of such a scenario on the Gulf economies is limited because the lowest breakeven oil price that will balance Gulf budgets is in the range of $35 to $50 per barrel, against the current price of about $130 per barrel. Not much to worry about there, apparently.
Still, although Gulf investors, banks, market intermediaries and regulators have learned a lot from the painful market correction two years ago, it would be in the interest of all stakeholders to keep an eye on the potential of high liquidity to overheat the markets.
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