To date, 2011 has been a volatile year for stock markets in the MENA region. The first quarter of 2011 was marred by a series of anti government revolutions, while the second quarter was affected by the worsening European debt crisis.
In the middle of this, the Saudi stock market has been one of the better performers in the region, thanks to the strength of its economy and the stability of its government. The Saudi stock market closed the first half of 2011 down a mere 0.68 percent – compared to the 6.52 percent decline in the S&P Pan Arab Index.
According to Sarah Al-Suhaimi, Head of Asset Management at Jadwa Investment, a leading player in the money management industry in Saudi Arabia, resilience of the Saudi market has been due to the strong fundamentals of the listed companies and the timely announcement of economic packages by the government.
She believes that the Saudi market is likely to outperform other regional markets going forward as well.
Turbulence on the Tadawul
The Saudi stock market – or Tadawul, as it is known locally – is the largest stock market in the MENA region, with market capitalisation of over $345bn. With average daily trading value of over $870m, it is also one of the most liquid markets around. Therefore, it is of great importance to any investor looking at the MENA region.
The first half of 2011 was characterised by the anti government protests that have come to be known as the Arab Spring. These protests in the region had their impact on the Saudi stock market as well. Against the backdrop of the region’s fast changing political situation, the Saudi Arabian government announced two welfare packages in February and March, estimated to be worth $170bn in total.
These packages carried two very important signals: first, that the Saudi government understood the issues faced by the general public; and second, that it had the financial muscle to address them. In these respects Saudi Arabia stood out from other countries in the region.
Both packages were well received by the Saudi people. Key areas addressed in the packages were the creation of new jobs, the start of unemployment benefits, the creation of a minimum wage, a one-time bonus to government employees, and improvements in the availability of housing and healthcare. “These steps support our view that Saudi Arabia is significantly different from other countries in the region, as it has the ability and willingness to genuinely address needs of its population and hence is not prone to the political instability seen in many other states,” says Al-Suhaimi.
These packages had two positive effects on the market. First, they reduced the perceived political risk of the Saudi market. Second, they are likely to have a positive impact on earnings of a number of sectors in the market. As a result the market rallied after hitting the lows in March.
The market’s uptrend was halted due to the worsening European debt crisis, which raised questions around the sustainability of the global economic recovery. However, as the 2011 second quarter result season drew closer, a pre-result rally developed.
“While the health of the global economy is important for the Saudi market, the local economic landscape is improving rapidly, which is beneficial for sectors like cement, building and construction, retail, and banks,” says Al-Suhaimi, whose team manages $2bn in assets across public and private equity, real estate and fixed income products.
Beating the benchmarks
Al-Suhaimi believes that the reason behind the strong performance of Saudi market compared to other major MENA markets is the impressive 20 percent earnings growth expected for 2011. “We believe that the Saudi stock market will witness the strongest growth among major MENA markets during 2011. Consequently we continue to be overweight Saudi in our GCC and MENA portfolios,” she says.
Jadwa’s funds have been leading performers in their respective categories since their inception in June 2007. Over the four years that the Jadwa Saudi, GCC and Arab funds have been in existence, they have returned 51.84 percent, 31.34 percent and 27.52 percent respectively. This compares favourably to the benchmark returns of 16.57 percent, -15.25 percent and -9.14 percent respectively.
Jadwa believes that the major government spending plan and the strong profitability of listed companies make the Saudi market highly attractive for investors. Moreover, economic and social conditions in Saudi Arabia are better than rest of the region. High oil prices – which are likely to prevail into the future – will keep government finances strong and help sustain government spending on social welfare and infrastructure development.
While Saudi is part of the MENA region, in many respects it stands apart from the rest.
