Opening of Saudi exchange to foreign investment off to slow start

It has been the most anticipated event of the year across Middle East markets – but the opening of the Saudi stock exchange to foreign investors has arrived with more of a whimper than a bang.

Since opening to the world on Monday, there has hardly been a stampede to access the US$560 billion market.

One reason may be that the gains made so far this year have made it expensive compared to other emerging and frontier markets, even though it boasts a large and growing middle class, fund managers said.

The benchmark Tadawul index fell 0.86 per cent on Monday and lost 0.18 per cent yesterday.

“Valuations look a little stretched,” said Sachin Mohindra, a fund manager at Invest AD, an Abu Dhabi-based asset manager. “We are not happy with current valuations, but the long-term investment case is very strong. We will be very watchful of valuations and we will get in again when there’s an opportunity.”

Mr Mohindra said that he had recently cut his holdings of Saudi stocks after increasing his overall Saudi holdings from 40 to 55 per cent of his portfolios from towards the end of last year until April of this year.

Saudi stocks trade at price-to-earnings ratio, a measure of value, of 20:1 compared to the 14:1 p/e ratio of the MSCI Emerging Markets Index. Typically the higher the ratio, the more expensive the stock.

The uptake from international investors has also been slow, analysts say, because the political risks have become more elevated amid the conflict in Yemen and after crude oil, the driver of the country’s economy, lost nearly half its value since the slide that began last year.

“We share the consensus view that there will be no big bang as QFI [Qualified Foreign Investor] rules take effect – trading on day one supports this view,” Simon Kitchen, chief strategist at the Egyptian investment bank EFG Hermes wrote in a report. “The earnings outlook is unclear because of lower oil prices and the potential for budget restraint, and sentiment may be affected by the Yemen conflict. We stay underweight, waiting for better entry points.”

The benchmark Tadawul index has gained 14.5 per cent this year, making it the best performing index in the Middle East. Still, despite the optimism this has engendered among local Saudi investors, the IMF is predicting that economic growth will slow to 2.7 per cent next year from 3 per cent this year after the price of oil fell by about half from its peak last year. The Saudi Arabian government relies on the sale of oil to fund 90 per cent of its budget.

Yet despite these woes, analysts say the economies of the oil-rich region will survive because spending is not being reduced and steady oil prices over the past couple of years have boosted cash reserves. The net current account surplus of the region stands at about $2.4 trillion, according to economist estimates.

In December, Saudi Arabia kept to its pledge to maintain spending this year. After the plunge in oil prices, officials said that its revenue was projected to fall to 715 billion riyals (Dh700.2bn) this year, from 1.04tn riyals last year. Riyadh projects this year’s expenditure to be about 860bn riyals.

Robert Ansari, the Middle East head of MSCI, told The National last month that if MSCI were to classify Saudi Arabia, the most likely classification would be as an emerging market, and that the earliest that could happen would be June 2017.

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