By: Matein Khalid, Chief Investment Officer & Partner at Asas Capital, in DIFC
Saudi Arabian equities have fallen victim to the US-China trade war and the emerging market meltdown since June. This creates a strategic buying opportunity in the Tadawul index since the macro fundamentals of the Saudi stock market suggest an imminent uptrend. Why?
One, Brent crude has risen to $81, up 20% in 2018. The Saudi Arabian and Russian oil ministers spurned Trump’s call to boost output at the recent OPEC conclave even as Venezuela’s economic meltdown, Iran sanctions, and the Libyan civil war reignite supply shocks in a tight global market.
Two, the US Dollar index has slipped from recent highs on ECB smoke signals about potential future tightening. A fall in the US dollar is a reflationary tailwind for the kingdom due to the Saudi riyal’s currency peg.
Three, a rise in oil prices and the 0.3 million barrel a day (MBD) increase in Saudi output, coupled with generous public sector bonuses, is a ballast for the Saudi economic growth rate. The kingdom emerged from recession in 2017 and can well deliver 2% GDP growth in 2018 and 3% in 2019, a bullish metric for Saudi earnings and equities.
Four, Saudi Arabia’s current account deficit had deteriorated to 10% of GDP during the depths of the 2014-16 oil price crash. SAMA had to intervene in the foreign exchange market to offset fears of a Saudi riyal devaluation. Thanks to the surge in Brent crude prices and lower remittances, the Saudi current account has moved to surplus at 2.8% of GDP. There is zero risk of a Saudi riyal devaluation in 2019, a compelling argument for emerging market fund managers traumatized by the Turkish lira and the Argentine peso.
Five, Saudi Arabia has announced the most expansionary State Budget in the modern history of the kingdom. Government spending will replace fiscal austerity as the dominant economic theme in the Kingdom. This is happening at the same time as private sector credit growth begins to rise, though construction growth remains anemic.
Six, MSCI and FTSE’s decision to upgrade Saudi Arabia, the largest stock market in the Arab world on both trading volumes and market cap, means $35 billion in foreign tracker funds to Tadawul’s biggest megacaps. SABIC alone is estimated to attract $2.9 billion. In fact, the delay in the Aramco IPO may well cause emerging market fund managers to take an overweight stance on the Saudi petrochemical sector.
Seven, Saudi Arabia is the least leveraged GCC economy at a time of rising US interest rates. Despite the kingdom’s epic sovereign bond/Sukuk issuances in 2016-18, public debt to GDP is still below 20%.
Eight, Vision 2030 envisages a new focus on capital markets deregulation, privatization and the promotion of foreign direct investment (FDI), still below 1% of GDP. As the REIT sector and the creation of Nomu exchange demonstrate, these are positive catalysts to recreate an “equity culture” in the kingdom after a lost decade. The Tadawul index is 7600 as I write. I expect it to trade above 9000 sometime in mid-2019.