Comment: Closure of the Kuwait Stock Exchange - panacea or aggravation?
Kuwait-based Global Investment House says that following the court-ordered suspension of the Kuwait Stock Exchange last week, the national authorities need to act decisively to restore investor confidence with measures such as changes in trading procedures, promoting the competitiveness of the market, and helping Kuwaiti nationals to play a more prominent role in the investment industry.
Trading on the Kuwait Stock Exchange was brought to a stunning halt on Thursday, November 13, followings a court order. The exchange remained closed till Sunday before reopening on Monday after the court approved a cabinet request to resume trading.
The administrative court had issued an unprecedented decision ordering the closure of the bourse and suspending the maturity of term contracts in order to stem massive losses by investors. However, the closure of the exchange was an act unbecoming the oldest market in the region and sending wrong signals across to intelligent and informed foreign and local investors. What made it worse was that the decision to close the exchange was not taken by its board but by a court.
The stock market is a platform that brings buyers and sellers together, facilitating liquidity and easier entry and exit strategies. Closure of such a platform not only threatens an investor with the profound and feared risk of illiquidity but also eliminates their option (indeed right) to limit losses (or book gains) and exit whenever they deem necessary. Closing down the market only induces further panic by shattering investor confidence.
An analogy might be a burning house with people inside, where someone locks the door. Investors will now be more cautious if not reluctant to invest in the local stock market, fearing a lock-in whenever things go awry, especially if other regional markets offer similar investment opportunities without the shut-down risk. Moreover, a death-blow is dealt to the idea of free markets and to the price discovery process, the significance of which should not be overlooked.
Considering one of the oldest trading floors, the New York Stock Exchange. History relates only two notable occasions since the start of the 20th century when the NYSE was shut down. The first was on July 31, 1914 and lasted for some time on account of World War I. The second was just after the September 11, 2001 attacks on the New York's World Trade Center, and the exchange reopened on September 14.
In both cases, the stock exchange was closed due to unprecedented events relating to the state either being under attack or caught in the middle of a global conflict. The Russian stock market also suspended trading on two days in mid-September this year after the index fell considerably. Here too the magnitude of situation went far beyond that experienced on the KSE. Moreover, trading was halted on the Russian market as an emergency measure by the government while it injected funds and carried out market stabilisation measures.
For an emerging market like Kuwait, transparency is essential to attracting foreign investors, which will strengthen the market. The country already lags in terms of attracting foreign investment. During the first 10 months of this year, Kuwaiti investors accounted for 92.1 per cent of total shares bought in value terms, while other Gulf Co-operation Council nationals and other outside investors accounted for just 2.6 per cent and 5.3 per cent respectively of total share purchases.
This shows that the proportion of foreign investors was already not very high in Kuwait and in fact lower than in many emerging markets. Such an action threatens to lead to a further diminution in activity by foreign investors.
Pressure in the local market is more of a global than a domestic issue. Closing the market is not a good decision when other markets all over the world are running smoothly, including those in other GCC countries where indices also took a battering. While further erosion of investment portfolios might be halted by the market going into a brief hibernation, it is an artificial means and offers no assurance that the market will not decline further in the future.
Meanwhile, the closure of the stock market has raised problems such as the price that financial institutions and funds use to mark their investments to market, and the ability of funds to offer redemption to unitholders and to determine an appropriate price.
The measures already taken by the Central Bank of Kuwait such as guaranteeing deposits, easing lending restrictions and reducing the discount rate, in addition to the Kuwait Investment Authority injecting money in the local markets, are all positive.
The Committee Responsible for Dealing with the Current Economic Crisis and its Effects on the Kuwaiti Economy, headed by the governor of the central bank, has a vital role to play in resolving these problems by suggesting solutions to the issues facing the economy. It has taken commendable steps in the right direction, although the measures need swift execution.
In addition to government initiatives, the market needs further intervention to restore confidence and to halt panic selling by investors. Some measure that could boost confidence in the Kuwait Stock Exchange could include greater transparency through the publication of more data and analysis on trading patterns, and lowering the initial margin for forward trading from 40 to 30 per cent.
The exchange should also use its financial resources to promote the stock market among local, GCC and foreign investors, and upgrade its information technology systems and related infrastructure. In addition, training sessions should be held for employees of investment companies and brokerage firms and there should be greater focus on the career development of Kuwaiti investment professionals.
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