Kuwait's bull run turns bearish

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A strong performance in mid cap and small cap stocks drove earnings growth at Kuwaiti companies in the first half of the year.

In 2008, large cap earnings growth is expected to fall by 4 percent, mainly due to a deceleration in earnings for KIPCO, National Industries and Agility.

Mid caps, which currently contribute to 27 percent of earnings, are expected to grow by 12 percent.

Kuwait International Bank is expected to lead mid cap earnings this year after posting a five-fold increase in earnings to $121m in the first half.

Small caps are likely to be the strongest performers with an earnings growth of 17 percent, but with a contribution of only 15 percent to overall earnings.

Companies like MENA Holdings, Kuwait Commercial Markets and Ekkitab Holding Company are expected to underpin small cap earnings growth, Markaz believes.

"In terms of valuation, the market still looks attractive because price to earnings is still in the range of 10.5 to 11, which is attractive compared to the UAE or Saudi counterparts," Hasan of Global Investment House says.

Looking ahead, he sees potential upside on the back of improved valuations and news that sovereign wealth funds will enter the market.

"Once the third quarter results start trickling in we might see upside to the volumes of trading, which have been down due to the holy month of Ramadan and due to investors who've stayed away from the market because it has been so volatile in the past weeks."

He expects companies to recover in the second half and to record profit growth of between 15 and 20 percent.

The Kuwaiti market has a reputation for being less volatile than other GCC bourses.

The number of listed companies is greater than in neighbouring Saudi Arabia. It is also less retail driven.

"If you look at the performance of the Kuwait Stock Exchange over a long period of time, it has always produced the best returns for the lowest risk," Raghu says.

"It is never a very high octane market, like Saudi or Dubai."

"By Kuwaiti standards, it has been more volatile this year, and in the last two months it has been really volatile," agrees Global's Hasan. "But if you compare Kuwait with Saudi, Qatar or the UAE, it has been less volatile."

Despite recent falls, Raghu at Markaz believes KIA, the sovereign wealth fund, is making the right decision in investing in local stocks.

"Once the market comes back to its normal valuation, that will have a positive impact," he says. Will it be a better investment than buying into Citigroup?

"Absolutely."

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