With the spectre of the global economic slowdown still looming over advanced economies, investors weary of waiting for the long anticipated financial rebound might do well to look to emerging markets for potentially attractive yields. Four years on from the credit crisis, advanced economies are still lagging behind global economic growth, which registered a pedestrian 3.3% rate of expansion in 2012 and is expected to increase marginally to 3.6% in 2013, according to IMF projections. The US and Japan managed growth of just 2.2% in 2012, although they fared better than their peers, with both the eurozone and the UK recording contractions of 0.4% for their economies.
At the same time, emerging markets grew by 5.3% on the year, while Saudi Arabia more than doubled the average growth rate of the Middle East region with its own impressive expansion of 6.8%. With the US and eurozone forecast to continue their weak recoveries with growth of 2.1% and 0.2%, respectively, in 2013 as they grapple with diverging central bank policies, uneven progress towards sovereign debt sustainability and fiscal austerity. More rapidly expanding economies could garner greater attention from international investors.
As the second-fastest growing G20 economy after China, Saudi Arabia could very well see an increase in foreign investment flows. Open to foreigners through a total return swap agreement first implemented in 2008, which allowed international investors direct access to individual shares for the first time (although without voting rights), the Saudi Stock Exchange (Tadawul) is one avenue that could see an uptick in activity. To date, international interest in the region’s largest bourse has been limited, with foreign investors representing just 0.8% of buying on Saudi Arabia’s stock exchange and 1%, of selling in June 2012, according to Tadawul figures.
However, the Kingdom’s stock exchange could provide regional equity traders with a bargain bin of equity options due to its slow growth relative to other comparable markets. Because the Saudi market has been outperformed by similar markets, some analysts are optimistic that it is due for a good run in 2013. The share prices for the world’s largest petrochemicals producer, Saudi Basic Industries Corporation, for instance, declined 6.75% in 2012, while the Saudi benchmark Tadawul All-Share Index increased by 5.98% in 2012 and was significantly outperformed by the MSCI Emerging Markets Index, which spiked 18.63%. The Saudi index also offers a higher dividend yield of 3.6% compared with 2.7% for the MSCI EM Index.
“We expect the first half to be bullish for Middle East and North Africa equities and see Saudi Arabia as the value story for 2013 across the emerging market space,” Digvijay Singh and Alexey Zabotkin, analysts at London-based investment bank VTB Capital, wrote in a research note on December 2012. The note went on to cite the combination of strong oil prices, infrastructure spending and dividend yields as catalysts that will help boost share prices going forward.
Another attractive aspect of the Saudi market is an expectation by analysts that the Capital Market Authority, the Saudi market’s regulator, could begin to allow foreign institutional investors to invest directly in the stock market. According to a June 2012 report by Al Rajhi Capital, the medium- and long-term benefits of such a move outweigh the risks, which include an influx of “hot money” and increased volatility, the need for domestic institutional investors, lack of independent monetary policy and no domestic bond market. The advantages of increased foreign investment in the domestic market could manifest themselves in a number of ways, including greater liquidity, efficiency, transparency and better portfolio management. The participation of foreign institutional investors could foster a change in status of Tadawul within global equity indices such as the MSCI EM Index. When and if frontier, or eventually emerging market, status is achieved, the Saudi capital market would then benefit further from increased international visibility.
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