Crude reasons support Saudi stocks

March 20, 2012

By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Foreign investors are sweet on Saudi Arabia. Overseas buyers made record net purchases in the kingdom’s $400 billion stock market last month ahead of an expected easing of ownership restrictions on outsiders. But in the run-up to better access, investors need to exercise caution.

Buyers from outside the six-nation bloc of the Gulf Co-operation Council ploughed a net 1.5 billion Saudi riyals ($400 million) into the market through swap agreements in February, according to the Tadawul exchange. The index is trading at its highest level – with its biggest volumes – since the collapse of Lehman Brothers in 2008.

Valuations look good on an historic basis with the Tadawul trading at around 12.5 times earnings on a forward basis and paying a dividend yield a little under four percent. That’s better than China and Brazil on both metrics, according to Riyadh based-Jadwa Investment, and is attractive against a background of low interest rates.

There are plenty of positives. Saudi’s $130 billion mega-stimulus – announced a year ago as a counter to the threat from the Arab uprisings – is boosting the economy. GDP is expected to grow 4.5 percent this year. After some slow years, bank lending to the private sector is now growing 1.7 percent month-on-month. And the rally in the kingdom’s petrochemical stocks has lagged a more pronounced leap in oil prices, says Abu Dhabi-based Invest AD.

Yet fears that Saudi might introduce a new tax on unused land is prompting high net worth investors to shift from real estate into equities, and that could be inflating stock prices. Fund managers are also wary about oil prices. At present, Saudi is benefiting from high oil prices and increased production due to sanctions on Iran. But either an escalation or unexpected easing of regional tensions could have negative financial effects.

Meanwhile, it is unclear quite how the liberalisation of stock market trading will work. It is expected that swaps agreements, with no voting rights, will morph into direct ownership. But positions may need unwinding. In a market known for volatility and a tendency to disappoint, that gives foreign investors further reason to restrain their enthusiasm.

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