Saudi market resilient despite EM turmoil: Deutsche Securities

The Saudi market has remained resilient, despite the recent sell-off seen in many emerging markets across the world, Ibrahim Fatani, Head of Discretionary Portfolio Management, Deutsche Securities Saudi Arabia, a subsidiary of Deutsche Bank AG told Argaam in an exclusive on Thursday.

Global investors benchmarked to any of the three main global equity indexes, such as MSCI, FTSE Russell and S&P are expected to start entering the Saudi market prior to actual inclusion, he added.

The full interview is below:

Q: What are the current as well as emerging challenges you are seeing in Saudi and regional stock markets?

A: I think the current challenges in Saudi Arabia and the region (GCC countries specifically) is that their economies are still heavily dependent on oil revenues, therefore the volatility of oil prices still dominate the performance of the economy, budget and the current account. This in turn may lead to macroeconomic uncertainty.

That’s why Vision 2030 is so important; the kingdom of Saudi Arabia has designed an ambitious economic restructuring plan, aimed to: (1) close the fiscal deficit and reduce the government’s dependence on oil revenue, (2) shift from a state-led to a private sector-led growth model and (3) boost local value addition, corporate productivity and human capital.

While much remains to be done, the Saudi government has already rationalized state spending, implemented two rounds of cuts to energy subsidies, launched VAT at 5 percent and introduced supply-side measures to boost employment of citizens, among other reforms.

Q: The upgrading of Saudi Arabia to emerging market status by MSCI, FTSE Russell and S&P opens new investment opportunities in the Kingdom. What is your take on this?

A: All the indicators so far in the first half of 2018 are promising. The oil price has continued an upward path, the non-oil economy has reacted positively to an expansionary fiscal policy, and the regulators, led by the Capital Market Authority, have seen through a program of reform aimed at making Saudi Arabia more attractive and welcoming to foreign investors.

I expect active investors benchmarked to any of the three main global equity indexes mentioned above 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.

Q: What advice do you have for an investor who wants to start trading in the Tadawul? What’s the near-term outlook?

A: I see strong thematic stories at play in the Saudi market. As a case in point, Saudi and GCC banks in general remain among the best positioned globally for rising US rates and have balance sheets that are strongly geared to benefit from the ongoing monetary cycle.

Saudi government reforms have continued and focus on increased privatization in the healthcare sector and improved enforcement of insurance policies, paving the way for some attractive investment opportunities in these sectors in the medium term.

Q: From a valuations point of view, is it time for investors to be greedy or fearful in Saudi capital markets?

A: Saudi Arabia is the largest economy in the MENA region; 23 percent of MENA GDP, accounts for 16 percent of global oil reserves and is the largest crude exporter. Collectively, MENA countries form the 7th largest economy globally.

The Saudi Stock Exchange, Tadawul, represents the largest market in MENA ($489 billion market cap), with 174 listed companies. Within an Emerging Markets context, Saudi Arabia tops Russia, South Africa and Turkey, in terms of market cap and liquidity.

The Saudi market has remained resilient, despite the Emerging Markets turmoil. The economic outlook is improving with the bulk of fiscal austerity already behind us, while index events should remain a key theme for the next 12 months, widening the investors’ base that invests in the region.

Write to Sunil Kumar Singh at sunil.kumar@argaamplus.com