Following on from last year’s declaration of intent, the Saudi capital market regulator is set to open the $560 billion stock exchange to qualified foreign institutions on Monday. Saudi Arabia’s stock market is larger than the stock markets in Mexico, Indonesia, Malaysia and Russia. Technicals are strong and valuations are likely to re-rate higher over several stages, particularly when the market is included in the main benchmark indices. Fundamentally, the market offers attractive exposure to petro-chemicals and consumer stocks with the latter strongly supported by counter-cyclical policies recently announced by the government.
Saudi Arabia is a very large, liquid market. It will potentially be the seventh largest Emerging Markets (EM) equity market by market capitalization, which places it just behind South Africa ($543 billion), but ahead of Russia, Malaysia, Mexico and Indonesia. The Saudi Tadawul Exchange trades on average $2.4 billion per day across 170 listed companies and offers a rich selection of opportunities ranging from banks to consumer-driven businesses.
The opening of the Saudi market will widen the foreign investor base, which is currently less than 2 percent of total holdings. Given the size and depth of the market, we expect Saudi Arabia to be included in the main EM equity benchmark indices by mid-2017, though this requires the authorities to further lift restrictions on access to the market. Should this happen, billions of dollars will flow into Saudi Arabia over the next few years, in our view.
Judging by other precedents in the region, such as Morocco, Egypt, UAE and Qatar, Saudi Arabia’s market is likely to re-rate when it becomes included in EM indices. Indeed, we see analogies to the opening of the Indian market for foreign equity investors and the on-going opening of the onshore Chinese stock markets.
Saudi Arabia’s decision to open its markets now is highly intelligent — global financial conditions are bound to become tighter in the coming years and the winners among EM countries will be those that are able to maintain or increase their share of a shrinking global "financial pie".
From a fundamental perspective, the opportunity in Saudi Arabia is exciting. Contrary to popular perceptions, Saudi Arabia’s stock market is not just about oil. In fact, not a single oil company is listed on the Tadawul Exchange. Petrochemical businesses have some correlation with oil, but they are exceptionally profitable given their access to low feedstock costs and offer less volatile earnings streams than other chemical businesses in other markets. Banks are also attractive with the country’s peg to the USD making them beneficiaries of rising rates. Large parts of the stock market consist of consumer businesses, whose earnings are determined by domestic conditions. Custodian of the Two Holy Mosques King Salman's affirmation of the country’s commitment to domestic spending and development and job creation creates favorable tailwinds for consumer-focused sectors, aided by the announcement recently of two extra months of salaries and bonuses. There are opportunities for consumer stocks similar to those found in some African or Asian markets, but at much more attractive multiples, because of Saudi Arabia’s very favorable demographics. The population distribution has a very low average age, which points to sustained consumer demand for years to come.
— John Sfakianakis is Middle East Director based in Riyadh for the Ashmore Group.