`Dumb-Money' for Saudi Stocks Won't Be Enough to Aid Market

19 Dec 2018, 12:59 AM IST

(Bloomberg) -- While billions of dollars will flow into Saudi Arabia with its inclusion in MSCI Inc.’s emerging-market benchmark in June, don’t count on the passive money to revive the market’s fortunes, says Eaton Vance Corp.

Government-related funds, which appeared to have propped up Saudi equities following the murder of columnist Jamal Khashoggi in October, will probably become sellers next year to investors tracking the MSCI index -- in classic buy-low, sell-high style, according to the Boston-based money manager. The kingdom will probably announce its 2019 budget later today.

`Dumb-Money' for Saudi Stocks Won't Be Enough to Aid Market

“We would expect a dumb-money passive bid to purchase Saudi equities, regardless of their valuation, which, I might add, is not particularly cheap,” said Marshall Stocker, a Boston-based portfolio manager at Eaton Vance, which oversees about $439 billion. “I do not think the Saudi stock market will trade up upon inclusion. Instead, the Saudi state may prove ingenious in selling their holdings to index funds.”

The Arab world’s biggest stock market is getting more expensive relative to developing-nation equities, with the gap in their estimated price-to-earnings ratios near the widest since 2015

Foreign-investor confidence has been frayed since June 2017, when the Saudis led a campaign to isolate Qatar, followed by what authorities described as an anti-corruption crackdown in November that saw billionaires imprisoned in the Ritz-Carlton in Riyadh. Khashoggi’s murder in the Saudi consulate in Istanbul in early October was the latest in a list of shocks that spurred outflows.

The Flip Side
Cairo-based EFG-Hermes Holding Co. expects Saudi inclusion in emerging-market benchmarks by both MSCI and FTSE Russell to draw as much as $22 billion from active money managers, on top of about $16 billion in passive inflows. That’s assuming total foreign ownership in the Saudi market will climb to the average seen in the United Arab Emirates and Qatar, which are already in the emerging-markets category, said Dubai-based strategist Mohamad Al Hajj.

The Flip Side

Cairo-based EFG-Hermes Holding Co. expects Saudi inclusion in emerging-market benchmarks by both MSCI and FTSE Russell to draw as much as $22 billion from active money managers, on top of about $16 billion in passive inflows. That’s assuming total foreign ownership in the Saudi market will climb to the average seen in the United Arab Emirates and Qatar, which are already in the emerging-markets category, said Dubai-based strategist Mohamad Al Hajj.

Foreign investors dumped Saudi stocks for seven straight weeks after the killing and resumed their selling last week. Local institutional investors snapped up more than $4 billion in shares in just two weeks. They have accumulated about $25 billion this year to control 68 percent of shares traded in Riyadh. Overseas investors own less than 5 percent.

Government involvement in the economy also appears to be growing -- not shrinking -- with delays in privatization while “mega-projects take off,” said Stocker. He’d rather invest in Kuwait and Egypt, which offer the “best combination of reform and attractive valuations.”

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Filipe Pacheco in Dubai at fpacheco4@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Robert Brand, Hilton Shone