INDEPENDENT NEWS

Cablegate: Bahrain's Stock Market Performance

Published: Sat 8 Jul 2006 07:19 AM
VZCZCXRO2893
PP RUEHDE
DE RUEHMK #1221/01 1890719
ZNR UUUUU ZZH
P 080719Z JUL 06
FM AMEMBASSY MANAMA
TO RUEHC/SECSTATE WASHDC PRIORITY 5160
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY
UNCLAS SECTION 01 OF 02 MANAMA 001221
SIPDIS
SIPDIS
EB/TRA/OTP, NEA/ARP
E.O. 12958: N/A
TAGS: EFIN ECON BA ECTRD REGION
SUBJECT: BAHRAIN'S STOCK MARKET PERFORMANCE
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SUMMARY
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1. (U) Like its GCC neighbors, Bahrain's stock market has
declined amid the regional market's plummet, but has
withstood the ordeal better than most. The Bahrain Stock
Exchange (BSE) did not have as far to fall, having seen
little of the surge in equity share prices evidenced
elsewhere in the region since early 2005. The BSE's lack of
volatility is partly due to consumer lending regulations that
discourage borrowing to fuel speculative investment. In
Bahrain's diversifying economy, surging oil revenues have not
played a central role in the market's performance, as in
other GCC countries. Conservative investors and a shallow
market also explain the BSE's relative stability. The BSE's
relative lack of volatility may trigger increased interest
from international investors in general and U.S. investors in
particular, but until the pool of available shares increases,
investors will find it difficult to translate this interest
into market activity. End Summary.
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BAHRAIN MARKET HITS LOW FOR YEAR
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2. (U) The Bahrain Stock Market (BSE) dipped to 1996.68 on
June 27, its lowest level of the year. In a decline that
began in February, the market gave back all of the gains
accumulated since August 2005. By the end of May, the BSE's
market capitalization had dropped to BD 6.37 billion
(approximately USD 17 billion) from BD 6.99 billion
(approximately USD 19 billion) at the end of January. The
BSE is currently down 9.1 percent for the year and 14.9
percent off the 2347.01 high set on February 1. However,
compared to several more volatile Gulf markets, the BSE's
performance has been relatively stable. The Omani market has
lost just 0.7 percent, but losses in the other GCC markets
have ranged from 12.7 to 56.7 percent.
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LESS BUBBLE TO BURST
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3. (U) Bahrain's market declines for the year have thus far
remained in the single digits because it did not participate
in the bull market run-up which had begun for most Gulf
markets by January 2005. Bahrain Stock Exchange Management
Director Fouad Rashid told the Ambassador June 20 that "the
market moves in a narrow range in Bahrain." According to the
July 1 Bahrain Tribune quoting Bahrain Monetary Agency (BMA)
Executive Director of Banking and Supervision Khalid Hamad,
"strict BMA consumer finance regulations discourage heavily
leveraged share purchases with the result that "the vast
majority of share purchases made by Bahraini residents in
2005 and 2006 have been made from holdings of cash.
Therefore, the upside in 2005 was significantly less and the
downslide was also far more restrained than that of our
neighbors."
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DIVERSE ECONOMY, CONSERVATIVE INVESTORS
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4. (U) Hamad also noted that, "Less than 30 percent of the
national economy is oil-related. This has meant that the
Bahrain economy has witnessed steady, modest growth, and has
not been swamped with liquidity from oil price rises."
Bahrain's market has been less volatile due to the
conservative nature of Bahraini investors. Share ownership
is dominated by diversified strategic long-term investors.
University of Bahrain Professor of Economics Dr. Jassim
Hussein recently explained to Econoff that local investors
have historically held shares for the long-term. He also
noted that the GoB, itself a significant investor in the
market, favors long-term investments.
5. (U) Securities and Investment Company Principal Broker
Fadhel Makhlooq told Econoff July 2 that because a sizable
percentage of shares in the 49 companies currently traded on
the BSE are held by conservative investors, there are
relatively few shares available to trade at any given time.
The resulting small pool of available shares represented an
unattractive environment to regional short-term speculators
flush with oil revenues. Even after regional markets began
to collapse, the BSE lacked the depth to absorb fresh
currency from recently liquidated investments in other
regional markets. (Note: There are 49 companies currently
traded on the BSE. Of these, 42 are Bahraini, three are
MANAMA 00001221 002 OF 002
Kuwaiti, two are Omani, one is Qatari and one is Sudanese.
End Note.)
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BAHRAIN HOSTS REGIONAL SECURITIES WORKSHOP
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6. (U) Public interest in transparency and regulation in the
capital markets has been spurred by the recent market slump.
The fourth annual workshop on securities market regulation
June 28-30, organized by the Financial Services Volunteer
Corps and the U.S. Securities and Exchange Commission and
sponsored by MEPI received favorable press coverage. Opening
the workshop, BMA Governor Rashid Maraj observed, "If
investors do not have confidence in the fairness, efficiency
and transparency of the market, they will feel that they are
not being adequately protected and will move out of the
market in pursuit of better opportunities elsewhere." Rashid
addressed an audience of securities exchange officials,
brokers and dealers from Bahrain, Egypt, Iraq, Jordan,
Kuwait, Morocco, Oman, Tunisia, UAE and Yemen.
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COMMENT
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7. (U) Once the market perceives that the BSE has bottomed
out, its conservative performance may spur new interest for
investors seeking stability over double-digit yields. This
interest apparently extends beyond Bahrain and even the
region. BSE Head of Public Relations and Marketing told
Econoff June 20, "After Bahrain, we expected to see the
majority of hits on our web site coming from Saudi Arabia,
but to our surprise they are coming from the U.S." With
implementation of the U.S.- Bahrain Free Trade Agreement,
U.S. interest will likely increase. However, until the pool
of available shares increases, investors will find it
difficult to translate this interest into market activity.
End Comment.
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