Foreigners Buy Saudi Stocks as Index Calls Loom, Oil Gains

(Bloomberg) -- Foreign investors are piling into Saudi Arabian stocks, counting on the country’s inclusion in emerging-markets indexes at a time when the outlook for oil prices is improving.

Foreigners were net buyers of more than 5.5 billion riyals ($1.47 billion) of shares for 11 straight weeks this year, according to data provided by Saudi Arabia’s stock exchange. Last week, they bought 1.375 billion riyals in shares, more than in any other week since Bloomberg started compiling the data in October 2015.

Foreign firms from Renaissance Capital to Deutsche Bank AG and Goldman Sachs Group Inc. are planning to expand in Saudi Arabia this year as they seek to benefit from a pickup in market activity fueled in part by government reforms to steer the economy away from oil.

Investors are also betting the kingdom will be classified as an emerging market by index compilers FTSE Russell and MSCI Inc. this month and in June, respectively, steps that could spur yet more capital inflows. The country’s main gauge is up 6.9 percent this year - more than the average gain of 4.2 percent for stocks from developing economies.

“We see scope for continued outperformance given our relatively constructive view on oil prices, the forthcoming FTSE announcement and continued healthy momentum in underlying earnings, particularly for the banks and petrochemical companies,“ said Hootan Yazhari, the head of MENA and global frontier markets at Bank of America Merrill Lynch in Dubai. “That is to say, earnings upgrades are outpacing downgrades in these sectors, which we see as supportive to performance.”

Read more about Saudi Arabia’s attempt to earn the emerging market classification.

Bank of America Merrill Lynch has Al Rajhi Bank, Samba Financial Group, Saudi Basic Industries Corp. and Yanbu National Petrochemical Co. (Yansab) as top picks in Riyadh. Al Rajhi has attracted $590 million alone this year, more than any other stock in the Middle East and North Africa and exceeding the net value for the full year of 2017, according to a calculation by Mohamad Al Hajj, strategist at the research arm of EFG-Hermes Holding.

Better prospects for oil, Saudi Arabia’s main export, is another factor boosting sentiment among investors, says BofA’s Yazhari. The 120-day correlation between the Tadawul All Share Index and the commodity became positive again last week for the first time since July. Saudi shares slumped as the price of Brent crude slid to a low of $27.88 in January 2016 and have followed its recovery since then. Brent traded on Tuesday at more than $67 a barrel.

“Higher oil prices are permitting the difficult changes to be made without impacting economic growth as heavily,” Yazhari said.

©2018 Bloomberg L.P.

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