Sarwar: The rally is underpinned by fundamental factors

Sarwar: The rally is underpinned by fundamental factors

Saudi equity market set for strong rally

June 2018

The Saudi equity market is gaining momentum as it heads for possible inclusion in MSCI’s influential emerging market index in 2018, following the FTSE upgrade as an emerging market last month, said an industry expert.

“This rally is underpinned by fundamental factors such as corporate earnings growth and supportive themes in a number of sectors,” said Shakeel Sarwar, head of Equities Asset Management at Bahrain-based Sico, a leading regional asset manager, broker, and investment bank.

“The market was relatively quiet during 2017 but started to pick up towards the end of the year with the expansionary budget announcement. This year, the market is up 15 per cent mainly on the back of news surrounding the Saudi market’s upgrade by FTSE and MSCI, which is expected to result in passive fund inflows of $15 billion. Large capital liquid stocks, which are set to prominently feature in the indices, have been the main beneficiary of the rally.”

Although passive flows will start from March 2019 onwards, active funds benchmarked to these indices have already started positioning themselves ahead of the upgrade ($2.5 billion year-to-date), said Sarwar, adding that market participants estimate that total active inflows could be in the range of $15 to 30 billion.

He explained: “We expect an approximately 25 per cent market return in 2018 and 2019, with 10 per cent  resulting from a price to earnings expansion, which takes the market ratio of trailing price to earnings to 18 to 19 times, which is not very expensive. Corporate earnings growth is another driver of returns which turned positive in 2017.”

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