Analyzing Kuwait Stock Exchange’s 5-Year Performance

The study focuses on the interlinkage mechanisms as well as constraints that have been characteristic of the KSE infrastructure as well as descriptive of its performance. On the one hand, the institutional legacy appears to strike a careful balance so as to facilitate FDI and portfolio flows while making the most out of conventional as opposed to Islamic style investment products. As it happens, the bulk of the asset types and qualifying prerequisites could loosely be reconciled to Western as well as Shari’a compliant counterparts. On the other hand, performance parameters such as values and volumes as well as index dynamics must have been driven by fundamentals that are largely shaped by the underlying economic model and its real business cycle (RBC) stages as revealed. The ‘silver lining’ to the oil price decline as observed over the last year could be the extent to which the respective sector has contracted in relative terms in the market composite and the economy portfolio alike. Put simply, the economy and the key indices such as IXP and IXW are prone to ever greater implied diversification, as the oil prices are unlikely to regain momentum anywhere around their all-time high. While at it, the two indices do not exhibit strong convergence, in pointing to rather differential outlooks as per the Oil & Gas sector’s significance. Part of the rationale could be the rather exacting restraints on volatility as well as scale-driven transaction costs, with the low relative turnover or number of trades in the sector illustrating just how costly or sticky recovery could prove in the aftermath of major contraction. Overall, the quotes band has seen reversion to the 5-year and 52-week low.


The Kuwait Stock Exchange (KSE) is second largest stock market with respect to volume and value in the Middle East. It is potentially positioned as a large-capacity marketplace to provide a meaningful benchmark to judge other trading venues’ performances against. On the other hand, its own performance will have to be gauged based on how critical its underlying economy profile has been in driving its own stock prices as well as indices. The current study dwells on the interplay of distinct performance facets with an eye on how a mixed institutional legacy, along with a specialized economy, could help rationalize its financial market’s efficiency and impact.

Instruments & Sectors

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Trading Instruments

For the most part, the KSE sells equity type and bond-like instruments, which supposedly fit into a murabaha versus sukuk dichotomy of Islamic proxy vehicles, in addition to conventional securities. The market has been broken down into the cash or spot versus future layers. The former hosts regular instruments that are supposed to be delivered as a subject to murabaha and mudaraba terms. In contrast, the latter extends the very definition of assets by tapping a level that, under the Islamic taxonomy, may or may not correspond to financial derivatives per se. In a sense, the domain could be viewed in regular terms as a tossup of forward versus futures type instruments. The fact that market makers or specialists are expected to set the prices and exercise horizons might point to an overlap with the common-law based legacy a la the New York Stock Exchange (NYSE, 2015). It remains to be seen whether the selfsame large players arrange block trades with a float of 5% to 30%, or act as ‘style’ investors, i.e. dealers opening long positions on selected sectors and industries (Barberis & Shleifer, 2003). On the other hand, their sole discretion as correlated with size or relative weight could be in line with the fact they fill in gaps in the less standardized markets such as the ones capturing forward as opposed to option-type contracts.

The more standardized futures instruments do not routinely involve large specialist players, with the flipside being the fixed or standardized terms of executing on cash and futures contracts. The latter domain might fall under either salaf or istisna’a type of arrangements. However, the aforementioned tools do not necessarily match either derivatives or debt leverage uniquely. In broader terms, they feature contracts that pertain to neither fixed income, nor interest bearing debt per se, as one way around the riba prohibition. Rather, the contracts might mediate delayed delivery of or exercising on actual securities of equity type, with a 4% fixed pay along with whatever rate the Central Bank claims, qualifying as either an option value or a transaction cost as opposed to interest (KSE, 2015). Whereas no volume or margin restrictions are imposed on futures transactions, a 40% equity margin on bulky forward tools, which appears in line with NYSE margin calls, would seem to qualify the arrangements as implied debt or leverage, albeit under strict prohibition of short sales.

Sectors versus Industries

There appears to be a very close correspondence between sectoral versus industry codes, even though the arrangement might look reversed compared to the normal order (Table 1). Given that the industry codes vary less frequently as compared to the sector codes, it follows that the former contributes to larger and more general aggregate, with the latter codes concentrating on the detail. In a sense, the phenomenon could guide one as to the sector-specific structure of the systemic or market risk. Among other things, one can appreciate that the trading hours or time slots have been arranged as well as distributed across the industry codes and instrument types.

Trading Arrangements

Trading Process

The interchange between the roles that big players or specialists have played in the operations of the KSE and the institutional or regulatory environment has been addressed previously. In particular, the specialists set the prices and delivery terms. In addition, KSE’s capacity has been leveraged effectively via harmonization and synchronization with venues such as the World Federation of Exchanges and the Arab FE (AFE, 2015). Cooperation and collaboration between the KSE, Egyptian, and Bahraini infrastructures have embedded mechanisms triggering and sterilizing contagious spillovers. In other words, scale may be seen as a leverage acting to augment the existing scope of investment products available, only because the otherwise thin standalone markets deny the ease of comparison and the network support for prices and volumes to draw upon.

Therefore, the terms and transaction costs do not need to fully converge. In fact, complete convergence is not the element that information efficiency builds on. For one thing, strong-form efficiency requires effort and hard work (Grossmann & Stiglitz, 1980). On the other hand, a legal overlap such as the British law underpinning the bulk of contractual arrangements in the Western on par with non-Islamic setups in the Middle East could account for reasonable convergence with the transaction odd-lot fees progressively turning low.

Apart from the direct transaction costs accruing to trading units in excess of KWD 50,000 (KWD 1.25 per each KWD 1,000) and the interest rates being imposed by the Central Bank, it appears that a host of implicit costs or constraints guide the trading process. Moreover, it takes on forms as diverse as lagged margin calls and restricted price fluctuation requirements, which amounts both to a stop-loss or limit cut-off. For instance, the client is free to act upon margin calls on T+1 terms, should the residual price fall below a particular margin. For that matter, it appears that no listed stock’s price can fall by more than ¼ KWD as per the initial prices under KWD 10 anytime; even though the actual, security-specific price unit restrictions vary widely.

Although it may not hold that Islamic type instruments are traded during the Ramadan only or within Ramadan-allotted time slots on a daily basis (Table 2), clearly there is a bias toward regular or non-derivative instruments based on the time slot allocation shares. For instance, regular trading spans (12:30pm-9:00am) =3.5 hours, as opposed to forward trading time spanning (01:15pm-12:30pm) =.75 hours, thus suggesting a 3.5/(3.5+.75)=82.35%. Interestingly, the Ramadan slots seem about 1.67 hours delayed, with the regular time trading slot making up a 2/(2+.75)=72.73%.

All of the bids, offers, and consummated transactions are to be cleared with the Kuwaiti Clearing Company (KCC) effective under the Amiri Decree since 1986. It could be of interest that the stabilizing mechanism had been phased in prior to the global market crash of 1987. As of year 2002, the market gained further liquidity by adding an extra clearing day for cash and cheque processing. The additional time spot was around perhaps amidst the interim global recession in between the 1997 and 2001 downturns.

Trading Values & Volumes

It is important to appreciate that the patterns and levels are partially driven by specialization, whereby the investment companies handle regular trades for listed stocks. The parallel-market transactions are mediated by brokerage companies. It would appear that an overlap between the regular versus OTC market might exist, yet the small proportion of the latter suggests that the capitalization qualifier increases the difference.

The gap may to an extent be bridged by resorting to the IXW index rather than the IXP counterpart, with the former showing a greater proportion as boasted by the parallel tier. As Table 5 suggests, there is no perfect match or unity correlation between the maximum daily values, volumes, and number of trades, even though the relationship appears fairly monotone. Among other things, in 2013, the index appears to be in the highest position, followed by gradual contraction or mean-reverting correction. In other words, there were signs of the economy decelerating prior to the same data having been embedded into the oil and gas fundamentals and quotes alike.

Apparently, some of the turnover indicators could be but a prior or interim proxy for the ultimate or long-term growth; ironically, on the strength of regulatory constraints. For instance, the 30% maximum cut-off on private placement floats has enabled FMCG companies like Mezzan Holding to estimate the IPO potential demand (Everington, 2015). Although the KSE has declined amid peer ME markets growing at an even faster rate, the partial substitution effect could build on discriminate tapping into sound, non-commodity assets as standalone picks.

Sayegh (2015) has considered a few alternate scenarios for how KSE’s capitalization could recoup its momentum on a meta-level of implicitly derivative type of ownership. Securitization is aimed to launch an IPO for the KSE itself, on the strength of Dubai SE having gone public and internationally owned. The key trade-off pertains to the allocation effects of ownership structure re-balancing and the way it could be weighed in against the distributional equity as a Shari’a requirement. In fact, the prerequisites might prefer nationally held shares to be bought into at a discount or as a matter of preemptive rights.

Therefore, part of the effect could be rationalized by referring to the over-optimistic expectations amidst the 2013 rally as mentioned above. Darwish’s (2013) account could hint at the early IPO rumors having been embedded from day one. Along with the fact that foreign capital had further leveraged growth reaching 40% since 2012 year end (and as high as 62% YoY), it should be no wonder that the exalted hurdle could never be sustained or outmatched eventually, with the peripheral layer of involvement withdrawn likely to have undermined momentum even further. It appears that early alerts were shining through the fact that the residual demand was largely speculative, with small-cap stocks of SME type companies traded all-out despite the blue chip quotes going sideways. In any event, it would have been indicative of the critical market inefficiency or investor community’s bounded rationality, had the IPO news been incorporated into the stock prices more than once. In fact, the strategy could have put many outsiders in a disadvantage, thus allowing some extra room for correction. By contrast, it does not appear that weak real estate prices, acting to prevent another bubble from looming large, could possibly compromise the market’s performance any further, as the expectations hurdle was not very high following the post-2008 recovery globally.

Stock Index Dynamics

Two key indices have been constructed and tracked historically, which are determined with respect to price levels versus weights, respectively. In a sense, both could be perceived as varieties of capitalization that are either largely value-driven or volume-laden. In the former case, stock prices supply the core constituency, with a total of two ‘correction factors’ accountable for effective adjustment as well as reconciliation across the sectoral and individual caps. In contrast, weights are determined as the shares of each standalone stock’s number of equity shares outstanding, which might appear to ensure a bias toward more diluted assets. Moreover, they will also exhibit a smaller price per share, or cap over the number-of-shares denominator, which amounts to a mean-reversion pattern and a rather compressed metric that is unlikely to diverge or stray off its reasonably representative value:

The resultant value can be adjusted via some kind of basis multiplier for practical purposes depending on the actual scale of share issuance or the free float percentage of it, e.g. times 1,000.

The proposed metric appears to effectively hinge on a quadratic of the total share float, or number of shares outstanding in the denominator. However, should phi as the effective free float percentage (or the proportion of shares issued to the general public rather than being held closely) turn out small, the effective basis adjustment factor will have shown to be compressed.
However, the ratio may still be at odds with the equilibrium, even in the event the index’s time path appears to have been oscillating around some kind of historic mean, as in the Kuwaiti case (Figure 1). Moreover, although the total market cap C proves invariant vis-à-vis either the standalone capitalizations or the interim individual numbers of shares outstanding, the denominator appear to allow manipulations. For one thing, most markets have seen a varying composition of the stocks represented, with the choice of the market portfolio plausibly affecting both the numerator and the denominator. The option to re-adjust or re-balance the market aggregate in ways that affect the systemic risk by adding on structural uncertainty can be allowed. More specifically, the resultant index could be reshuffled so as to keep it rising even amidst an interim decline in the preceding total cap. For that matter, on the micro-level, any major buybacks could reduce S and IPOs or private placements increase it along with the C numerator, with the net index effect being mixed as well as unstable.

When it comes to the actual performance of the price and weight indices (P-index or IXP, and W-index or IXW), the elements appear to have been traded anywhere near their 52-week low (Tables 3 through 4). For IXP, the previous close at 6,190.39 serves as the reference over and above the all-time YoY low at 6,096.62, to check the last 6,183.15 closing price value against. It could, among other things, be of interest that the proportion of parallel market trades was negligible at 3/(210+3)=1.4%. In terms of daily volume and value, that makes a negligible 31,580/(9,822,691+31,580)=.32% and 854/(793,110+854)=.11%, respectively. In other words, the over-the-counter segment is either lagged or minor. The former does not correlate with market efficiency per se, as it can hardly vary within the same marketplace. The latter might be suggestive of near full compliance with the qualifying capitalization and capital adequacy criteria for most companies being traded (i.e. KWD 10M). In passing note that the KSX15 sub-aggregate has been computed as a P-index as well.

For the IXW or W-index, the ultrashort-run or daily-trade snapshot is similar. The last close at 417.54 hovered anywhere near the previous close at 417.59 and the 52-week low at 408.09. The number of parallel trades made a proportion of 11/(11+387)=2.76%, whereas the volume and value suggested 29,172/(1,637,216+29,172)=1.75% versus 1,080,380/(15,022,197+1,080,380)=6.7%. The calculations illustrate how divergent structurally or proportionally the two otherwise co-moving or monotonously correlated indices could prove. Moreover, IXW is apparently stickier on a daily-trade basis, which might be hard to detect over the long haul.

Evidently, the IXP has been traded near its baseline, just above the 5-year low (Figure 1). Thus, the factor may or may not have paralleled the real business cycle, yet the optimism is apparently on the downtrend as a response to a sustained YoY sag in the oil prices. Bearing in mind that the oil and gas sector had long constituted the bulk of the net exports and the respective component of the GDP, it should come as little surprise that the respective sectorial securities aggregate has contributed a far lesser share lately (Figure 2).


Some Islamic counterparts of the conventional investment vehicles or products have been analyzed for the purpose of comparison. At the same time, Kuwait’s economy is representative of the Middle East region at large while chiefly building on business solutions that lend themselves to the UK style common law as deemed fit for an international milieu. From visual inspection of the key five-year dynamics, the evidence includes a rather monotonous pattern of correlation or co-integration across metrics as diverse as, value, volume, and the number of transactions finalized. The correspondence is not one-for-one or linear, yet its covariance with the real business cycle is manifested. The oil and gas sector has worked as a kind of two-way growth leverage accounting for the bulk of growth on the upside and the heaviest contraction in downside transition. Incidentally, the tumbling oil prices that saw an oscillatory YoY pattern amidst long-term negative outlook must have been preceded or mapped into by the dwindling fundamentals that may have signaled shrinking derivative demand. On the other hand, if the nature and structure of the broader transaction costs along with effective constraints were to undergo close scrutiny, it would turn out that some of the volatility has been sterilized. The factor could secure interim cushion enough to fend off some of the overreaction to oil price downturn.

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