Saudi stock market basking in global investor interest

Saudi Arabia's Tadawul stock exchange is attracting increased interest from international investors. (Reuters)
Updated 29 July 2018
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Saudi stock market basking in global investor interest

  • Saudi share index gains 17 percent this year
  • Overseas interest fueled by string of upgrades

DUBAI: Is the Saudi stock market in the middle of a spectacular bull run? Some leading market experts think so.

Analysts at Jadwa Investments, the Riyadh-based financial group, believe it “totally plausible” that the Tadawul All Share Index (TASI), the main equity performance measure in the Kingdom, could be set for a 20 percent rise between now and early 2019, lifting it above the 10,000 point level for the first time since the heady days of 2014, before the oil price collapsed. It currently stands at around 8,400 points.

That would top an already strong performance in the first half of this year, boosted by inclusion in the top-three emerging market (EM) indices. The TASI is 17 percent ahead already this year, making it one of the best performing markets in the world, and the leading market in the Gulf.

All the signals have been pointing in the right direction so far in 2018. The oil price has resumed an upward path, the non-oil economy has reacted positively to an expansionary fiscal policy, and the regulators, led by the Capital Market Authority, has seen through a program of reform aimed at making Saudi Arabia more attractive and welcoming to foreign investors.

Global investors are buying into the Saudi story.

Jadwa said in a recent report: “We believe growing confidence in the nature and direction of structural economic reform, instituted as part of the Kingdom’s Vision 2030, has provided the backdrop to facilitate such sizable investments into the Saudi Stock Exchange.”

This new-found confidence was reflected in the decision by the three main global equity index providers to upgrade Saudi Arabia to emerging market status, alongside such economic powerhouses as China and India.

First FTSE-Russell awarded EM status in February, and S&P similarly upgraded last week. Sandwiched in between those was the “big one” — the move in June by MSCI to award EM ranking. Those accolades followed three year’s of hard work by the Tadawul and the CMA to make the biggest Gulf market also one of the best run and regulated.

EM status makes a big difference to global investor sentiment.

“We expect active investors benchmarked to MSCI EM to start entering the market prior to actual inclusion, which is expected to drive TASI performance even higher, similar to patterns observed with other regional equity markets prior to MSCI EM inclusion,” it added.

The Riyadh market performance has been all the more impressive in light of a growing aversion by global investors to EM destinations. Many big economies, like Russia, India and Nigeria, have seen net outflows so far in 2018, Jadwa said, while inflows to countries like Mexico, China and Brazil have been proportionately lower than into Saudi Arabia.

Furthermore, the experience of other regional markets — in Dubai and Abu Dhabi — of EM inclusion suggests that the best is yet to come for the Kingdom. Both saw significant rises after the announcement of inclusion, before trading actually commenced on the new status. Saudi Arabia will become a fully tradeable EM market in stages by the end of next year.

Jadwa’s position at the heart of the Riyadh financial hub gives its optimism some authority, but other analysts injected a note of caution into their forecasts.

ason Tuvey, Middle East analyst at London based Capital Economics, said that the surge of interest in Saudi Arabia as a result of the EM upgrades was only likely to be temporary, and that previous revival of foreign interest in Riyadh as an investment destination — as when foreign investors were first allowed to own shares in 2015 — had proved to be a false dawn.

Tuvey added that other factors would remain more important in determining global investor attitudes. “Historically, given the economy’s heavy dependence on oil revenues and the large proportion of petrochemical companies that make up the stock market, the Tadawul has closely tracked swings in oil prices,” he said.

With the future course of oil prices uncertain in view of regional geopolitical and global economic factors, Tuvey predicted a fall in the TASI of around 6 percent by year end.

Nasser Saidi, former chief economist of the Dubai International Financial Center and now an independent economics consultant, also sounded a note of caution. “The volatility of oil prices still dominate the performance of the economy, budget and the current account. This has meant macroeconomic uncertainty, accompanied by uncertainty surrounding policies in response to the fall in oil prices. In turn this means that investors whether domestic or foreign are in a ‘wait-and-see’ mode,” he told Arab News.

“Geopolitics, with ongoing wars in Syria and Yemen, and sanctions on Iran are negatively affecting investor sentiment, and Trumpian trade wars that can derail global economic growth, recovery in Europe and disrupt trade. In turn this affects the oil price and Saudi exports to China and other Asian countries,” he added.

He also warned of an after-party effect from soaring share prices. “The evidence also suggests a negative effect on the market on the actual event of reclassification, with prices falling. This involves investors speculatively bidding up securities prices and returns, before the actual reclassification event, in the expectation that foreign investors will be entering the market, resulting in prices falling following the actual reclassification event.

“Exuberance and market hype accompanying market reclassification can lead to asset price bubbles,” he added.

Foercasting the financial markets is a hazardous affair, but for now Saudi Arabia is basking in the limelight of being one of the world top equity investment destinations.


World’s biggest sovereign fund worried about trade wars

Updated 21 August 2018
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World’s biggest sovereign fund worried about trade wars

  • The fund posted a positive return of 1.8 percent, or 167 billion kroner ($19.8 billion), in the second quarter
  • Markets are worried about a trade dispute between the United States and China

OSLO: The managers of Norway’s sovereign wealth fund, the world’s biggest, expressed concern Tuesday about global trade tensions, which could heavily impact its value.
The fund posted a positive return of 1.8 percent, or 167 billion kroner ($19.8 billion), in the second quarter, helping erase a loss of 171 billion kroner in January-March that was attributed to a volatile stock market.
The Government Pension Fund Global, which saw its total value swell to 8.33 trillion kroner by the end of June, manages the country’s oil revenues in order to finance Norway’s generous welfare state when its oil and gas wells run dry.
But Norway’s central bank, which runs the fund, said geopolitical and trade tensions presented a risk.
“It’s fair to say that increased trade barriers or even trade wars will not be beneficial for the fund as a long-term global investor,” Trond Grande, the deputy chief of Norges Bank Investment Management, told reporters.
Markets are worried about a trade dispute between the United States and China. Accusing Beijing of unfair competition, the US administration is considering slapping a new round of levies worth $200 billion on Chinese goods.
Talks between the two slated for Wednesday and Thursday aimed at resolving the dispute have however eased concerns somewhat.
Following US-Turkey tensions that sent the Turkish lira and the Istanbul stock market tumbling, the Norwegian fund said its assets there were worth less than the 23 billion kroner they were at the beginning of the year.
“We’ve seen the market rise for a long time, that there are different political and geopolitical events in the world that can affect the market, and we have to be prepared for the fact that (the value of) the fund can go down a lot,” Grande concluded.
The fund’s strong second quarter was attributed primarily to its share portfolio, which accounts for 66.8 percent of its investments and which rose by 2.7 percent.
Real estate holdings, which account for 2.6 percent of its holdings, rose by 1.9 percent, while bond investments, which represent 30.6 percent, remained flat.
Faced with falling oil revenues in recent years, the Norwegian government has been tapping the fund to finance public spending since 2015. But with oil prices recovering, the fund registered its first inflow in three years in June.