MANAMA: Finally, the largest MENA and GCC market will soon be opened to foreigner investors, with an expected $55billion of inflows, according to a report.
Last month, Saudi Arabia revealed its intention to open up its $570billion stock market to foreign investors in H1 2015, after being restricted to GCC nationals, out of which foreign investors can only invest in Saudi shares through financial instruments, such as swaps and exchange-traded funds (ETFs).
Reacting to the news, MSCI announced it will review the addition of Saudi Arabia as a constituent to either its Frontier or Emerging Markets indices once the long-awaited reforms are officially approved.
“Based on two different scenarios, we estimate additional foreign inflows into the Saudi stock market (Tadawul) at $55billion, noting an estimated current foreign ownership of 1.44% (c.USD8b) of total market capitalization,” Mubasher Financial Services, in a statement said.
“Meanwhile, we rule out the likelihood of Tadawul’s addition to MSCI FM. Rather, an inclusion in MSCI EM is more likely given its relatively large market size and abundant liquidity. We calculate that passive and active funds tracking MSCI EM can bring in up to $55billion of inflows to Tadawul, in case of inclusion.”
Double-digit earnings growth, high liquidity, and high correlation to S&P 500 all support valuation: Saudi Arabia’s Tadawul index (TASI) trades at 2014e PER of 16.8x, a premium of 15% above other MENA markets’ average of 14.7x. Only Dubai and Kuwait markets trade at a premium to Saudi Arabia (5% or 2014e PER of 17.6x for the former; 2% or 2014e PER of 17.2x for the latter). In our view, there are three points to justify Tadawul’s relatively high valuation i.e. expected double-digit earnings growth over the next two years (+21% in 2014 with a PEG ratio of 0.8x and +13% in 2015). Also, Saudi Arabia’s earnings beat-to-miss ratio has been on an uptrend since Q1 2013 for revenues and Q3 2013 for earnings, indicating that more recently companies are beating than missing analyst estimates, which suggests future earnings upgrades; a highly liquid market (average daily turnover of $2.4billion over the last six months, c.125% higher than the average daily turnover of other MENA markets combined). As expected, the news that Tadawul will soon be opened to foreign investors, albeit with certain rules, drove the market higher on positive sentiment. Local investors bid the market higher beyond 10,000 – a technically important level – in hopes that foreign inflows will push the market even higher. Indeed, the market is up some 9% since the announcement and recently high correlation between TASI and S&P 500 – add to Saudi Arabia’s strong link to the global economy –suggests the former’s high double-digit 2014e/2015e PERs are comparable to S&P 500’s 16.3x/14.7x. The correlation between the two markets has increased from 0.38x in the first five years to 0.45x in the latter five years of the last ten years.
“We think Tadawul’s bull market still has legs, but it will likely pull back in the short term as investors lock in some profits. Our long-term technical target is 12,000, an upside of 13%,” the statement added.