By Matein Khalid: Chief Investment Officer and Partner at Asas Capital
I had written a column in early 2018, presenting six reasons to buy Saudi equities. In retrospect, this was my best-emerging market strategy call of 2018. Saudi Arabia’s Tadawul index was the world’s second best performing emerging market in 2018 after Egypt, a horrific year for the asset class and MENA. For instance, the Dubai Financial Market (DFM) Index, was one of the world’s worst-performing stock markets in 2018, down 26%, thanks to the meltdown in property developers like Emaar and DAMAC.
Saudi Arabia’s Tadawul index is up 20% in the last three months. The market cap of the Saudi stock market is now $570 billion, more than the combined market cap of all five GCC states. It is simply impossible for any credible emerging market investor to ignore the kingdom of Saudi Arabia, the financial superpower of the Arab world and owner of almost one-fifth of the world’s proven oil and gas reserves. The Saudi kingdom is also OPEC’s powerbroker and a geopolitical colossus whose “riyal politik” shapes events from the Maghreb to Pakistan. I expect Saudi equities to be the most attractive financial market in the Middle East in 2019, the reason I own the MSCI Saudi Arabia exchange-traded fund (symbol KSA), up 32% since my original column to buy Saudi equities was published. Why?
One, the recent Aramco bond issue was a blowout success. The world’s (actually history’s) most profitable company attracted $100 billion in bids for a $12 billion US dollar bond new issue, lead managed by J.P. Morgan, Morgan Stanley, HSBC, Goldman Sachs etc. it demonstrated that Saudi Arabia has restored its relations with Wall Street, disrupted by the killing of Jamal Khashoggi in Istanbul last October. Saudi Aramco would not have sold bonds for funds it did not need as its net income is above $110 billion a year. The conclusion is obvious. The Saudi Crown Prince plans an Aramco IPO in 2019, the biggest flotation of all time – and Wall Street covets the fee bonanza.
Two, Saudi Arabia has been upgraded by MSCI and FTSE from frontier to emerging market status. This means $40 billion of offshore tracker funds will flow into bellwether Saudi Tadawul stocks.
Three, the Saudi-Russian output pact and geopolitical shocks in Libya, Algeria, Venezuela, Sudan and Iran mean Brent crude has surged above $70 a barrel in 2019. Saudi Arabia’s budget deficit has fallen from 15% of GDP in 2015 to below 4% now. The Royal Court has unveiled the most expansive State Budget in the modern history of the kingdom and boosted welfare spending to $50 billion. Saudi Arabia’s liquidity cycle has finally broken out of the 2015-17 credit crunch, as I predicted it would. This is hugely positive for the valuation of Saudi stocks – and Asas Capital’s flagship Park Regis Makkah hotel, due to open in July 2019. This macro call on Saudi equities and Makkah hotels was a money maker for those who agreed with my macro projections in early 2018.
Four, Saudi banks have been on a roll as net interest rate margins surged with the four Fed rate hikes in 2019 and merger mania frenzy. Those lucky enough to buy Riyadh Bank or even NCB made 40 – 50% cash on cash returns. Congratulations and celebrations, as Englebert once crooned.
Five, Saudi Arabia has demonstrated its capability to impose financial discipline on even the princes of the House of Saud and restrained corruption. The government has introduced a value-added tax (VAT) and cut fuel/electricity subsidies. Yet an expansionary fiscal policy, the return of offshore capital flows and higher crude oil prices have boosted economic sentiment, investor psychology and consumer spending.
Six, there has been an epic transformation in the religious tourism paradigm in the holy cities of Makkah and Madina. The kingdom has spent 100 billion Saudi riyals on new airports, high-speed rail links, Hajj/Umra terminals and the expansion of the Grand Mosque to hold two million worshipers. There is a chronic shortage of branded four-star hotel rooms at a time when Umra visa issuance is set to double as per Vision 2030. This is the reason new branded hotels are deluged with bid from the cognoscenti even before we have opened our doors for business. Timing, as in love and war, is everything in global finance – and we got the Makkah hotel cycle timing on the money.