Analysts Say Saudi-Canada Fuss Is Noise, But Doesn't Look Good

(Bloomberg) -- Not helpful, but unlikely to have much immediate market impact.

That’s how investors are describing Saudi Arabia’s decision to suspend diplomatic ties and new trade dealings with Canada over that country’s call for the release of a women’s rights activist. The spat came as the Middle East’s biggest economy, which allowed foreign investors direct access to stocks in 2015, steps up measures to lure investors as it tries to diversify its oil-dependent economy.

“There are some things that look positive while there are others that look as regressive as we have seen in the past,” said Marie Owens Thomsen, global head of investment intelligence at Indosuez Wealth Management in Geneva. “As an international investor, arguably, you really don’t know at which leg to stand on. Even if it doesn’t necessarily have a direct impact on business dealings, it doesn’t help.’’

Here is a snapshot of Saudi assets as on Monday:

  • The Tadawul All Share Index fell 0.2 percent by the close on Monday in Riyadh, extending its losing streak to five sessions. The MSCI Emerging Markets Index also dropped 0.2% as of 1:40 p.m. in London
    • The gauge is still up 14 percent this year, mostly on the back of the country’s inclusion in emerging-markets indexes from next year
  • The yield on Saudi’s dollar bond maturing in March 2028 fell three basis points to 4.28 percent
  • Forwards on the riyal due in 12 months dropped 3.8 percent to about 51 points in the offshore market

Here’s what investors said about the diplomatic spat with Canada:

Thomsen at Indosuez:

  • “Saudi Arabia is trying to diversify away from oil, and that is not super easy. Why not go for the easy wins? And one of the easy wins is to get educated women that are today young to become more active in the economy as a whole. Which is already happening, to a certain extent. But, from a western perspective, there is still a long way to go.’’
  • “I would think that it would be in the interest of the countries in the region to continue to liberalize the situation for women, because they are sitting on an oil well in that sense and they are not using it to the full’’
  • “It is encouraging on the one hand that there seems to be some easing up on certain fields, such as the right for women to drive. But this kind of reaction nevertheless suggests that there is a long way to go’’

Sergey Dergachev, senior portfolio manager at Union Investment Privatfonds GmbH in Frankfurt:

  • “The reaction of the Saudi government does not surprise me at all. It is not only viewing comments as interference in domestic affairs, there is more behind it.”
  • “It would have been a completely different story if the U.S. would have closed its relationship with Saudi. And at the moment, the relationship also between Canada and U.S. governments -- both on the political and economic front -- is quite modest. And I do not expect that other Western countries will follow Canada.”

Zeina Rizk, director of fixed-income asset management at Arqaam Capital Ltd. in Dubai:

  • Doesn’t see the news impacting the market “for the time being”
  • “I don’t think this news will cause emerging-market managers to change their view as we have no clarity on what ‘cutting ties’ means. And the major players in the GCC markets, besides the local investors, are Asian investors, followed by U.S. investors and then European”

Joice Mathew, the head of equity research at United Securities in Muscat:

  • “There is progress in gender equality in the country, there is advance in freedom of speech. But at the same time, economic reforms are easier to implement than social ones. Investors looking at such markets are used to this, to a certain extent”
  • While the decision to cut ties with Canada is not seen as impacting market directly now, “we could be see a bit of a correction in the Saudi market; that has been happening for a while now. There could be a bit of a drop, but not much”

Nabil Al Rantisi, managing director at Daman Investments in Dubai:

  • “I don’t really think this will impact prices or volumes. It is more of a Canadian opinion on what Saudis are doing at hone. I find the two sides having a bit of an overreaction”
  • “There is opportunity in the Saudi market at the moment, you find investments flowing in. Saudi is still is in the spotlight, and I don’t think this should escalate over the next few days”

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