Saudi Arabia’s stock market, the largest and busiest in the Middle East, will likely remain under pressure by the ongoing political turmoil in the Arab region despite massive royal financial packages announced over the past month, according to a key investment company in the Gulf Kingdom.
The packages announced by King Abdullah for citizens, worth a total $128 billion, lifted Tadawul bourse after plunging to its lowest level in nearly 22 months early this month, the Riyadh-based Jadwa Investments said.
“At its current level we think the market is attractively valued. While two substantial government spending packages will boost the economy, regional tensions are likely to linger through this year and weigh on investor sentiment,” Jadwa said in a nine-page analysis sent to Emirates 24/7.
“After an examination of the prospects for all sectors, we conclude that the fair value for the TASI at the end of the year is around 7,400, but the political uncertainty elsewhere in the region means this level is not likely to be reached and instead the TASI will end the year between 6,600 and 7,000.”
Jadwa said the market as a whole remained undervalued but added that some sectors are more attractive than others and will be profitable through 2011.
“Moves in global markets have the potential to pull the TASI away from our forecast, though we do not foresee them exerting too much pressure this year. With the global economic outlook generally encouraging, we anticipate modest gains for global stock markets over the rest of 2011,” it said.
The report noted that Tadawul, which accounts for nearly a third of the total Arab market capitalization, has underperformed the recovery in developed and emerging stock markets over the past two years, adding that the prevailing regional political environment means it is likely to do so again this year.
“There are risks to the global market outlook and an intensification of one of these, such as the Eurozone debt problems or a dramatic tightening of Chinese economic policy, would probably pull down the TASI. Allowing greater foreign participation in the market would lift both values and volumes, though we do not think this will occur during 2011.”
The report showed the fall in the TASI this year has moved valuations into attractive territory, with the price-to-earnings (P/E) ratio falling below 12 at its March low point and it is now 13.5, compared to an average for 2010 of 15.8.
At this level, it remains well above most of the other markets in the GCC, which is normal given the local bias of the Kingdom’s large investor base, though it is now some way below the P/E for the Kuwaiti market, which is unusual, it said.
“Compared to global markets, the TASI also looks reasonably valued. The P/E is below that of many fast growing Asian countries, and on a par with China. It is also below those of the UK and US, which have lower earnings potential, though it is above other leading emerging markets such as Brazil, Turkey and Russia.”
Turning to foreign investors, the report said they fled the local market when the unrest in Egypt intensified at the end of January, but were net buyers during February though the regional troubles spread closer to the Kingdom’s borders.
Monthly data published by Tadawul on the breakdown of stock market trading showed that there were net sales worth SR905 million by foreigners through the swap agreement in January, compared to average net purchases of SR290 million per month during 2010.
“Given that the Kingdom was one of the regional markets favored by foreign investors at the start of the year and that performance was good in the first part of the month, we estimate that well over SRone billion was withdrawn from the market by foreign investors in the final few days of January,” Jadwa said.
“In contrast, in February, foreign investors were net buyers of shares worth SR40 million, with total purchases, at SR1.67 billion, the highest since October 2009.”
According to the report, one of the arguments against a broader opening of the market to foreigners is that flows of “hot money” would bring greater instability.
“The data for the last few months are not conclusive. Foreigners account for only a small proportion of total trades (an average of 2.5 per cent over the first two months of this year, compared to 83.8 per cent for Saudi individuals), but trends in foreign transactions are closely watched by other investors,” it said.
“While foreign outflows may well have contributed to the 5.1 per cent fall in the market in the last few days of January, the 6.5 per cent plunge in February occurred while foreign institutions were buying and was clearly driven by local retail investors. We do not expect any further opening of the market to foreign investors this year.”
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