So, you are an emerging markets investor, or concerned about the volatility in the US or European markets. If you have worries about a slowing of Chinese investments, or you believe a global financial bubble is about to burst, you may want to consider pouring some of your assets into the number one emerging market in the Middle East: Saudi Arabia.
Experts say the safest emerging markets are those which are flush with liquidity. This allows investors to keep investing and buying, even when an emerging market undergoes a correction.
Case in point: Saudi Arabia and the GCC. Although the Saudi stock market and its smaller neighbors experienced substantial corrections in 2006, their fundamentals have remained strong and analysts said the drop was softened by their abundant liquidity. We all know the story of the oil price boom of the past two years and how it swept billions of dollars in windfall revenues into GCC economies, driving their stock markets up.
Until February 2006, GCC bourse indices broadly mirrored the upward price movements of oil. But then the investors caught on to the notion that price-to-earnings ratios of 30 to 40 times have moved beyond reason. It has been well reported how retail investors, who jumped on the bourse bandwagon late, lost their (borrowed) shirts in the downturn.
However, the second half of the story is that the fundamentals of corporate health—at least for blue chip firms—in GCC markets are today better than recent stock prices suggest. This has a lot to do with the way in which the high GCC oil revenues have percolated into the economy and created growth potential.
Should you trust Gulf markets, especially the Saudi Stock Exchange? You may want to take a cue from the prince, and this is not Machiavellian talk. In early February, Al Waleed bin Talal, nicknamed by Time magazine as the Arabian Warren Buffett, announced that his company, Kingdom Holding Company (KHC), has approved a plan to invest around $2.5 billion in the Saudi stock market. The money will mainly go to the banking, media and real estate sectors.
Middle East markets trending upward despite volatility
Still concerned? It is true that some Saudi investors in spring 2006 tried to prop up the Saudi bourse through loudly-announced share buying that slowed the slide but could not stop it. But this is different.
Al Waleed’s modus operandi is to buy strategic stakes in global brand name companies during times of distress on the stock exchange, and to work closely with management to engineer a turnaround. Al Waleed sees the markets in the Middle East, where most of his money was being invested since 2004, as “trending” upward.
Al Waleed’s confidence appears to be well-placed, as the latest figures of corporate earnings for the listed companies have registered strong and consistent growth in the last five years. At $458 billion, the Tadawul Stock Exchange is the fifth-largest in market capitalization within the global emerging market universe, and the most liquid.
After a 32% drop in market capitalization as of early 2006, valuations improved and positive projections are expected for the next five years. SABIC, the petrochemical and construction company for example, is selling at 15 times the expected 2006 earnings, down from a peak of 40. American and European banks, which have long scoured GCC countries almost exclusively to reel in high net worth clients, are increasingly paying attention to the development of these markets. The analysts of these global banks now recommend bouquets of strong but undervalued Saudi companies.
Sound good? There’s just one catch: To invest you must be a Saudi resident. So start making friends in Riyadh.