Saudi stocks to offer attractive long-term returns: report

Saudi equities across cap sizes are likely to offer attractive long-term returns, given the continued earnings growth, increased political stability, and rising penetration of consumer products, a new report issued jointly by Emirates NBD Asset Management and Jupiter Asset Management said on Wednesday.

In anticipation of the now-confirmed MSCI upgrade, the Tadawul All Shares Index (TASI) is up 15 percent year-to-date in 2018, in stark contrast to the MSCI Emerging Market (EM) index itself, which is down 2 percent for the year.

“With a raft of socio-economic changes taking place in the Kingdom  – from women driving to the opening of the first cinemas – we are seeing huge opportunity for EM investors in 2018-19," said Salman Bajwa, senior executive officer at Emirates NBD Asset Management.

"While the country has been able to plug forex leakage with issuance of US dollar-denominated debt, a great deal more can be achieved through its stock market, especially after inclusion on the FTSE Russell and MSCI EM indices."

TASI is up by double digits year-to-date, and ENBD’s Saudi Arabia Equity Fund has exceeded 18 percent returns, he said, adding that “investors have become increasingly bullish on the Kingdom.”

At a weighting of approximately 2.6 percent and with 32 securities selected in MSCI EM index, the importance of the upgrade as a catalyst for the Saudi capital market cannot be ignored, with the upgrade likely to bring inflows of $45 billion from global investors.

In fact, fund managers from the US, UK and Asia have already dipped into the Saudi stock market, with foreign inflows passing $3 billion by May 2018, which is equivalent to all inflows to the UAE and Qatar for the whole of 2014, when they were upgraded.

The report said that after a foothold has been gained in global indices, it is more than likely that a stream of listings for state-owned jewels will ensue. 

Many of these will hold considerable appeal with trophy assets are expected to be heavily subscribed, it added.

However, the report warned that a number of sectors in Saudi Arabia may seem attractive at first glance, but investors should be selective and avoid blindly following indices.

Additionally, economic reforms such as the introduction of value-added tax (VAT) and the removal of fuel subsidies may initially inhibit growth.

But, top sector targets including healthcare, consumer and insurance are set to benefit from both structural reforms and the Kingdom’s initial EM index weightings, it noted.

Meanwhile, the outlook for Egyptian equities remains positive, with the EGX30 index expected to trade back to its 2014 high, offering potential returns of 40-50 percent over the next two years.

In addition, as the Egyptian pound strengthens, companies reliant on imports are set to benefit from improved earnings, it added.