Emerging market sell-off impacting Saudi equities, but outlook positive: analysts

The recent sell-off in emerging market (EM) assets is having some impact on trading in Saudi stocks, but higher oil prices and reforms carried out by the Kingdom’s bourse are reasons for optimism, analysts told Argaam.

“The sell-off in EM along with high prices of some blue-chips already had an impact on Saudi market, which retreated by over 12 percent from its high in 2018,” said Hettish Karmani, head of research at Oman-based Ubhar Capital.

Saudi Arabia’s Tadawul All Share Index (TASI) plummeted to a six-month low on Sept. 5, tumbling 3.1 percent to close at 7,719 points amid a broader EM sell-off. The index has mostly recorded declines in subsequent trading sessions.

In a recent note to investors, consultancy FXTM warned that the turmoil across EMs could be here to stay due to several key market themes.

“Prior to the brutal EM currency sell-off, escalating global trade tensions already weighed heavily on emerging markets while a broadly stronger dollar compounded downside pressures. With mounting expectations of higher US interest rates seen as another nail in the coffin, EM currencies could remain depressed for a prolonged period,” FXTM said.

Over the past six months, many of the world’s fast-growing economies have found themselves in economic trouble. Key examples are Argentina, which received a $50 billion bailout package from the International Monetary Fund last month, and Turkey, which has seen its currency lose 40 percent of its value against the US dollar this year.

Further weighing on emerging market assets are the ongoing trade tensions between the US and China. Accordingly, stock markets of many developing countries have slumped in value, and the MSCI Emerging Markets index has plunged by more than 20 percent since the beginning of the year.

“Although global risk-off towards EM and Asian equities is one of the reasons for weakness in Saudi market, according to trading data, domestic institutional discretionary portfolio management accounts (DPMA) and Saudi retail remain the major sellers in the Saudi market,” said Nishit Lakotia, head of research at Bahrain-based SICO.

“So while QFI buying has definitively reduced since August, I believe the weakness is mainly stemming from domestic selling currently,” he told Argaam.

Nonetheless, the recent retreat means that Saudi stocks are now priced more attractively, Ubhar Capital’s Karmani said.

Moreover, oil prices are currently hovering close to $80 per barrel (bbl), after trading in $70-80 range for over four months. This would give the government extra petrodollars that would fuel the much needed liquidity in the local market, he added. 

Meanwhile, Ehsan Khoman, head of MENA Research and Strategy at MUFG Bank, said the Saudi equity market has been “broadly immune” from the EM rout and broader contagion experienced over the summer.

“Both institutional and retail investors continue to take comfort from the financial market policy recalibration that has been underway in recent years, with considerable amendments to laws and regulations in the Kingdom aimed at,” he said.

Tadawul has implemented several reforms aimed making the financial instruments more internationally tradable, Khoman noted, adding that this is deepening the breadth of the financial sector and in-turn enticing foreign investment.

Some of the measures include allowing Qualified Foreign Investors with a minimum of 5 years’ experience and only $1 billion  of assets under management (AUM), down from $5 billion set in 2015, to apply for licenses to trade equities directly.

Other reforms, such as shifting the settlement cycle to T+2 and the introduction of short-selling, have made the bourse more attractive to investors and secured it an upgrade to EM status by foreign index compilers, MSCI and FTSE Russell.

Write to Jerusha Sequeira at jerusha.s@argaamnews.com