Kuwait's markets remain dynamic two years since the outbreak of the mortgage crisis in the US, Kuwait-based Kuwait Financial Centre (Markaz) said in its latest report about the country's investment climate. “The markets are exceedingly dynamic and not static by any means,” it said. The report aims to shed light on the extent of the damage incurred by Kuwaiti investment companies (and their shareholders and clients) in 2008, in addition to the options available to policy makers to provide economic solutions on the one hand, and the choices faced by companies to draw lessons from the current crisis on the other. In light of the explosive growth in the Kuwaiti investment sector over the past few years, coupled with the severity of recent global financial turmoil and the contagion it has had in Kuwait thus far, investment firms will need to adapt themselves to the realities of the new global financial order, whereby credit/liquidity will be harder to come by and clients will demand more simplicity in products. Consequently, we see a few possible changes to the investment sector landscape over the coming years. Despite the abysmal sector performance in 2008 (with a net loss of KD892 million or $3.09 billion), due to high investment losses on the back of impairment in assets, 2009 is likely to be significantly better for investment companies in the sector. Losses in 2008 were the result of a toxic combination of impaired assets (particularly illiquid assets such as private equity, real estate etc) and sharp declines in worldwide equity markets which caused contractions in quoted investments and funds. Focus on fund-based activities like investing proprietary capital proved to be volatile in nature, the report noted, saying that focus on more fee-based activities like asset management and investment banking are more stable income sources. The report said a stress test for quoted and unquoted investments, which form the bulk of investment company revenues and were the root cause for losses in 2008, showed that the cumulative profits of investment companies should touch KD713 million during 2009 as against a loss of KD892 million during 2008. However, this would still be lower than the record profits the investment sector made during 2007 at KD903 million. The global economic crisis appears to have bottomed out and it seems the worst is behind us as evidenced by recovering commodities prices with oil prices doubling year-to-date and rebounding markets having gained 20 percent to 60 percent above their troughs of last year. Government policies have materialized either as incentive packages or the nationalization of financial institutions (and sometimes, a combination of both), although recovery is imminent, it is still too early for government intervention to be withdrawn. “Although the Kuwaiti financial sector was at the heart of the crisis locally, it cannot be summed up as a battle between good (transparency and good governance) and evil (lack of transparency of companies and the mistakes of others), it extends to the private sector as well as other players including the government and economic policy makers,” Markaz report said. Assets held by the investment sector in Kuwait almost match those of the banking sector, making it the second largest sector in the country. The huge losses sustained by the investment sector in Kuwait resulted in aggregate corporate earnings in Kuwait declining by 50 percent decline for the year and resulted in a 25 percent decline in aggregate GCC corporate earnings on an annual basis. __
