Investors expect strong rally in Saudi equity market, says SICO

The Saudi equity market is gaining momentum ahead of upgrade to MSCI’s emerging market status in 2018, following the FTSE upgrade as an emerging market last month, Shakeel Sarwar, head of equities asset management at Bahrain’s SICO investment bank, said in a recent statement.

Several fundamental factors are driving this strong performance, such as higher corporate earnings and supportive measures in several sectors.

The market is up 15 percent mainly on the back of news about potential inclusion of Saudi Arabia in FTSE and MSCI emerging markets indices, which is expected to result in passive fund inflows of $15 billion.

Large capital liquid stocks have been the main beneficiary of the rally.

Investors expect that total active inflows to range between $15 and $30 billion.

Although passive flows will start from March 2019 onwards, active funds benchmarked to these indices have already started positioning themselves ahead of the upgrade ($2.5 billion year-to-date, Sarwar said.

He explained: “We expect an approximately 25 percent market return in 2018 and 2019, with 10 percent  resulting from a price to earnings expansion, which takes the market ratio of trailing price to earnings to 18 to 19 times, which is not very expensive,” he added.

Many stocks are likely to benefit from cyclical trends and structural changes such as, higher interest rates, petrochemical sector profits, which could get a further boost from global growth and rising oil prices, retail firms which are gaining market share on Saudisation, subsidy cuts and taxes.

In addition, regulatory changes in the insurance sector, such as enforcement of mandatory third party liability motor insurance will also drive equities.

Saudi Arabia’s fiscal position appears to be significantly better compared to the past two years due to structural reforms implemented by the Kingdom.

“With the successful implementation of VAT and partial removal of fuel subsidies, the market will be closely following other anticipated reforms, as well as the listing of oil giant Aramco,” Sarwar  said.

“The future for the Kingdom looks exciting as the government sets about modernising the economy by aggressively venturing into sectors such as tourism, entertainment, alternative energy, and transportation. Growth and development of capital markets will remain one of the government’s key priorities in order to ensure efficient allocation of capital,” he added.