With speculation growing that Saudi Arabia might loosen restrictions on foreign investment in its stock market, the oil-rich country could present global investors with a play on rising middle-class spending that is surprisingly similar to developing Asia, according to an expert.
Sachin Mohindra, portfolio manager of the Invest AD GCC Focus Fund, in Invest AD April Market Outlook explained that global investors could be drawn to the consumer and banking sectors, which are benefiting from a government fiscal stimulus programme.
According to him, local market operators seem convinced Saudi Arabia will introduce a quota scheme for foreign investors similar to those operated in China and India. Currently, investors from the six-country Gulf Cooperation Council can access the market, while other foreign investors can invest through a swaps programme, but cannot hold voting rights.
“One clue that possible change is afoot lies in the sudden spate of advertisements placed by listed firms looking to hire investor relations professionals. The regulator is also demanding disclosure of the identity of each foreign buyer accessing the market through swaps, suggesting it is profiling likely future investors and increasing monitoring of foreign ownership levels, while also trying to improve transparency,” he said.
“But banks and brokers have not yet been formally instructed to ready back office operations, and key issues such as allowing access through multiple brokers need to be addressed. So any change this year is likely to be in the second half.
“The $350 billion stock market – similar in size to Indonesia’s – would not give investors exposure to state oil companies, which are not listed. It does, however, offer the most profitable petrochemicals firms in the world, a banking sector rebounding from a bad-loan problem, and consumer plays benefiting from pump priming.
“The Saudi market is trading at around 14 times earnings, similar to Chinese equities. But listed Saudi firms are expected to have recorded 25 percent earnings growth in 2011, versus China’s 15 percent.
“Saudi Arabia’s economic story, once solely focused on oil, is becoming one of increasing domestic demand – a theme that has drawn global investors en masse to Asia.
The country’s oil wealth means that official income per capita stands at a relatively high $24,000 per year – similar to Portugal’s – but penetration levels for many goods and services are very low compared to other developed countries.
Given that a third of the 20 million Saudi citizens are under the age of 15, swelling the flow of entrants to the workforce over the next decade, consumer spending is likely to rise steeply in coming years.
With job creation and boosting domestic demand its major priorities, the Saudi government announced last year a $130 billion package for education, healthcare, housing, and a rise in civil service salaries.
The country can afford it, and has room for more economic stimulus. According to the Economist Intelligence Unit’s “wiggle room” index, Saudi Arabia has the most fiscal and monetary firepower among 27 key emerging economies, with its current account and budget surpluses and low debt ranking the country higher than next placed China and Indonesia.
Much of the planned spending is only trickling through to the real economy now, with contractors breaking ground on projects announced in 2011. Most of the activity has been in building schools and hospitals. A plan to build 500,000 new houses has stalled because developers are struggling to deliver homes big enough for the average Saudi family at the price specified by the government.
From an investment point of view, the stimulus package should feed into the earnings of listed consumer plays such as supermarket chains, telecoms companies, and logistics firms.
The extra kick for the economy is also good for banks, which are coming out of a provisioning cycle rooted in the 2008-2009 global economic crises.
In Saudi, loan growth is currently at around 12 percent. And although banks may not participate directly in some infrastructure projects – for example, the Riyadh metro is being funded completely by the state – lending is likely to accelerate to fund expansion at companies linked to infrastructure, for example in the areas of construction, logistics, and transport.
“Of course, oil remains the key driver of the Saudi economy, accounting for about 45 percent of GDP.
It is this ready supply of energy that gives the country’s listed petrochemicals companies by far the widest operating margins in the industry.
And a high global oil price, currently inflated by tension over Iran’s nuclear programme, allows Saudi Arabia to spend and to save. With an average crude price of $100 per barrel this year, the country would record a budget surplus of four percent of GDP.
If the Saudi market opens up, global investors may find that regional geopolitical risk is outweighed by potential high reward.”