A ‘quiet transformation’ is taking place across the Gulf Cooperation Council region, but guidance remains relatively rare
Across the Gulf Cooperation Council (GCC), a quiet transformation is underway – one that could reshape how companies communicate with investors and influence the broader dynamics of capital allocation.
At its heart, this transformation revolves around two critical pillars: transparency and guidance. Despite their importance in fostering investor confidence, lowering capital costs and reducing market volatility, these practices remain underutilized in the region. Bloomberg data as of September 30, 2024, reveals that out of 829 actively traded companies in the GCC, only around 4 percent, or 30 companies in total, provide forward guidance.
This statistic underscores a compelling opportunity: companies across the region have a clear path to deepen investor trust and strengthen market stability.
The stakes are high, as the total market capitalization of GCC equities is $4 tn. Yet companies providing forward guidance account for only 12 percent of this value. This limited engagement highlights the potential for greater transparency and suggests that a deeper commitment to forward guidance could offer tangible benefits for both investors and issuers.
Current landscape of guidance practices
The data shows that guidance practices vary significantly by country. The UAE leads in absolute terms, with 14 companies providing guidance, while Qatar, with 6 companies, is strong relative to its market size. However, larger economies such as Saudi Arabia have only a handful of companies providing guidance. These figures suggest that while some markets are experimenting with transparency, a broader shift is still needed. Increasing the number of companies offering guidance would deepen investor understanding across the region, laying a foundation for healthier capital markets.
Sectors that lead and lag in guidance
Examining guidance by sector paints an equally interesting picture. While certain sectors like communication services and energy are making strides in providing forward guidance, the majority of sectors remain hesitant. The financials sector, despite being the largest in terms of the number of listed companies, shows particularly low adoption when it comes to the practice, which may inhibit deeper engagement with institutional investors, who typically demand more transparency in financial reporting.
Real estate, consumer discretionary and industrials – all sectors with a heavy reliance on macroeconomic conditions – are notably lagging.
Transparency brings measurable benefits
For today’s investors, transparency isn’t just a nice-to-have but a critical factor in decision-making processes. In the GCC, companies offering forward guidance experience average daily value traded of $8 mn, compared to $4 mn for companies without guidance, according to an analysis of Bloomberg data. This suggests that companies with guidance practices tend to have higher trading volumes, reinforcing the idea that transparency attracts investment.
Institutional investors also appear to favor companies with guidance. Across the GCC, companies providing guidance have an average of 17.1 percent of their free float held by institutions, compared to just 9.6 percent for those without. This pattern is evident in individual countries as well, with institutional ownership of company free float significantly higher for those providing guidance – such as in Bahrain (48.9 percent vs 14.5 percent), Qatar (27.2 percent vs 16.6 percent), the UAE (15.7 percent vs 12.8 percent) and Kuwait (8.2 percent vs 5.8 percent). Even in Oman and Saudi Arabia, where overall percentages are lower, there’s a clear preference for guided firms.
The link between guidance and analyst interest
Analyst coverage serves as a barometer for investor sentiment and can be significantly influenced by the availability and quality of disclosure. Forward guidance also affects analyst interest.
On average, GCC companies with guidance consistently receive significantly higher analyst coverage compared to those without, underscoring the value that transparency brings. For example, in Saudi Arabia, companies with guidance have an average of 10.7 analyst recommendations, while those without receive only 2.6. This trend is evident across other GCC markets: in the UAE, companies with guidance attract 7.9 recommendations vs just two for those without. In Kuwait, companies with guidance see an average of 4.2 analysts versus just 0.3 for those that do not. Even in smaller markets like Oman and Qatar, companies with guidance command much higher analyst attention.
This disparity drives home the point that providing guidance not only enhances investor confidence but also draws increased scrutiny and interest from sell-side analysts, potentially contributing to improved liquidity and valuation stability.
Similarily, there is a stark difference in consensus ratings between companies with and without guidance. Across the GCC, companies that provide guidance have an average rating of four compared to just 1.5 for those that do not. This trend holds true across each GCC country, underscoring the idea that companies engaging proactively with analysts through transparent disclosure practices are more likely to receive favorable recommendations and stronger market support. Again, these numbers are based on an analysis of Bloomberg data.
Navigating the risks of providing guidance
When considering the adoption of forward guidance in the GCC, companies must recognize the potential risks, particularly in a market where the practice is still emerging.
Introducing guidance for the first time may lead to significant market sensitivity, as any new information could trigger price volatility. Additionally, misalignment between guidance and actual performance could harm investor confidence, especially in a region where expectations around transparency are still evolving. Credibility is also at stake – overly ambitious targets or a failure to meet guidance can undermine trust in management and more so in a market unaccustomed to such practices. However, by carefully managing these risks, companies can foster greater investor engagement and align themselves with global standards.
Given the limited practice of forward guidance among companies in the GCC, there is a clear opportunity to improve transparency and strengthen investor confidence. Providing guidance on a set of financial and non-financial metrics that highlight key value drivers and strategic goals not only helps investors navigate the inherent uncertainties in the market but also fosters more informed decision-making. Introducing forward guidance thoughtfully, by providing a range of potential outcomes and long-term metrics, can enhance coverage and liquidity by attracting more investor and analyst interest.
By taking this step, GCC companies can ultimately align themselves with global best practices and enhance their attractiveness to both local and international investors.