Saudi Stocks Could Be Way Up, Then Down, in 2019

(Bloomberg) -- For Saudi equities, 2019 may be a story of two halves.

The kingdom’s stocks are set to rally in coming months as billions of dollars gush into the market following its inclusion in two key developing-nations equity benchmarks. But that may give way to selling before Ramadan, the month of fasting that begins in May, as concerns over reforms and oil prices move back to center stage, according to Nomura Asset Management.

It will be “a positive first half and a potentially negative second half,” said Tarek Fadlallah, the chief executive officer of the Middle East unit of the Tokyo-based investor, which oversaw $485 billion globally as of end-September.

Saudi Stocks Could Be Way Up, Then Down, in 2019

Saudi Arabia’s Tadawul All Share Index is among the world’s best performers this year, after chalking up its biggest weekly gain since April. It advanced 0.7 percent Wednesday, bringing its 2019 advance to 8.5 percent.

Increased spending by the government, efforts to end the Saudi-led war in Yemen and “a sliver of hope” for an easing of tensions with Qatar will further boost the kingdom’s stocks, said Dubai-based Fadlallah.

The country’s inclusion in the MSCI and FTSE Russell emerging-market benchmark indexes will probably attract as much as $20 billion in passive inflows, even as profit growth at listed companies stagnates, said M.R. Raghu, the head of research at Kuwait Financial Centre SAK, which manages more than $3 billion. In contrast, profit at publicly traded companies in the Gulf will probably increase by 5.2 percent, he said.

Deficit Overshoot

There’s also reason for investors to be cautious about the influx of foreign money into the Arab world’s biggest equity market. More than half of the stocks are held by government-related funds, strategic investors and insiders such as founding shareholders, Fadlallah said. A liquidity boost will allow them to “sell into the tide of money flowing in from outside,” he said.

Saudi stocks are also getting more expensive relative to developing-nation equities, with the gap in their estimated price-to-earnings ratios near the widest since 2015.

With Brent crude down about 30 percent from a four-year high in October, most analysts expect the Saudi budget deficit to overshoot, requiring at least $50 billion in financing, Fadlallah said. Government-related entities, including oil giant Aramco, may require a similar amount in funding, he said.

While raising this money in international capital markets will be challenging, excessive reliance on local borrowing would crowd out the private sector, whose investment activity is critical for growth, he said. And foreign direct investment, estimated at 13 billion riyals ($3.5 billion) last year, is unlikely to pick up significantly soon.

While Crown Prince Mohammed bin Salman is opening Saudi Arabia to foreign investment to wean the economy off oil, he’s also cracked down on dissent, imprisoning dozens of critics. The murder of columnist Jamal Khashoggi in the Saudi consulate in Istanbul in October was the latest in a list of shocks that sent global funds fleeing from the world’s biggest oil exporter.

“Foreign investors will continue to crave visibility, guidance and clarity that comes with a transparent and accountable operating environment in Saudi Arabia,” said Ehsan Khoman, head of Middle East and North Africa research and strategy at MUFG Bank Ltd. in Dubai.

©2019 Bloomberg L.P.