Saudi stocks set to rally this year with multi-billion dollar inflow

The kingdom’s stocks are set to rally in coming months as billions of dollars gush into the market on its inclusion in benchmarks for developing-nations. But that may give way to selling before Ramadan, the month of fasting which will begin in May, as concerns over reforms and oil move back to the forefront, 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 Tokyo-based Nomura Asset, which oversaw $485 billion globally as of end-September.

The nation’s Tadawul All Share Index is amongThe kingdom’s stocks are set to rally in coming months as billions of dollars gush into the market on its inclusion in benchmarks for developing-nations.

But that may give way to selling before Ramadan, the month of fasting which will begin in May, as concerns over reforms and oil move back to the forefront, 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 Tokyo-based Nomura Asset, which oversaw $485 billion globally as of end-September.

The nation’s Tadawul All Share Index is among the world’s best performers this year, after chalking up its biggest weekly gain since April.

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.

Saudi Arabia’s inclusion in emerging-market benchmarks by both MSCI and FTSE Russell will probably attract as much as $20 billion in passive inflows, even as profit growth at listed companies stagnates, said MR 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 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 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.