Wary Saudis Need Better News on Economy to Snap Stock-Sale Habit

(Bloomberg) -- Saudi authorities are changing market regulations to attract foreign investors to the country’s stock market. Those changes haven’t enticed local individuals to buy shares.

Net sales of Saudi stocks by retail, high-net-worth and individual professional investors stretched to 80 consecutive weeks at the end of November, figures from the Riyadh bourse show. They have only bought in three weeks since detailed data started 27 months ago. Institutions have been more positive, purchasing stocks when local retail investors sell, seen by some analysts as a sign of government support.

The selloff by individuals has been unrelenting since oil prices started their decline in 2014. Government efforts to reduce reliance on crude exports, sell stakes in state companies and shake up market regulation to make equities more enticing have yet to win over locals.

Last month’s corruption crackdown and regional risks stemming from the conflict in Yemen and tensions with Iran haven’t helped either.

“Retail investors have been selling amid concerns regarding the current macro situation,” said Jassim Al-Jubran, equities analyst at Aljazira Capital in Riyadh. “The latest geopolitical issues make retail even more cautious. Even the recent increase in the oil price has not been enough to increase their appetite.” News of stepped-up spending by the government in the next budget could help sentiment to recover, he said.

Mutual funds and entities tied to the government are among institutions that have increased their ownership of local shares to 67.1 percent as of the end of November, more than 2 1/2 times the proportion held by individuals. That ratio was below two in August 2015.

Here are some further views on why Saudi investors have been persistent sellers:

Naeem Aslam, chief market analyst at TF Global Markets in London:

  • “The Saudi government needs to assure investors that its foreign polices are not going to make the region more unstable. Under the current climate, we do think that the geopolitical tensions in the region would escalate further.”
  • “The fact is that you will not be comfortable as an investor given the current climate. The practices which we are experiencing are unheard of,” he said, referring to the crackdown on corruption
  • “In other words, this is uncharted territory and retail investors do not want their hard earned money at risk.”

Mazen Alsudairi, head or research at Al Rajhi Capital in Riyadh:

  • Some of the concerns that are top-of-mind for individual investors include VAT-tax regulation, increases in taxation, and the potential for further weakness in oil prices.
  • “Investors in Saudi are very risk averse. And there are two parameters that affect this: the time horizon of their investments and the amount of capital they have in their portfolio. So the shorter the investment is, the less risk they’re willing to take.”
  • Institutions that are buying stocks include the Public Investment Fund -- the sovereign wealth fund, and pension funds. “They have the time horizon that allows them to buy and stick with it.”

Michael Bolliger, head of emerging-market asset allocation at UBS Wealth Management’s chief investment office in Zurich

  • The incentive to diversify among Saudi investors is seen as increasing “during times of heightened market volatility, which is what we observe currently in the Gulf Cooperation Council region, following the corruption probe in Saudi Arabia and the developments in Yemen and Lebanon.”
  • “We expect the economic transition and reforms to continue in the kingdom, which should ultimately bode well for the medium- to longer-term growth prospects of the entire region and the opening up of financial markets.”
  • “This can imply that Saudi Arabia becomes a more important market going forward for equity investors too. Again, however, we wouldn’t be surprised to see further bouts of near-term volatility.”

Hasnain Malik, head of equity research at Exotix Capital in Dubai:

  • Selling by individual investors is “likely an indication of a loss of local confidence.”
  • Institutions include “professionally managed funds and quasi-sovereign wealth, and here low valuations and government support may be at play."
  • Foreign institutions are a small factor, but this should change gradually as Saudi Arabia wins inclusion in emerging-market indexes, such as those compiled by MSCI Inc. and FTSE-Russell, given the weighting the Riyadh market will likely carry.

Aljazira Capital’s Al-Jubran

  • “Institutions are basically supporting the market now. They end up playing as market makers, playing more of a stabilizer role.”
  • “It is the government trying to send the message that they want to see the market more stable somehow.”

©2017 Bloomberg L.P.

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