Sitting on the plane from Riyadh after my fifth visit there in 16 months. Why, you may ask yourselves, this strong interest for Saudi Arabia?
When we launched our global frontier markets strategy in December 2014 it was clear from day one that we could not ignore Saudi Arabia. Despite being the nineteenth largest economy globally with a lively capital market and a stock market that turns over $1.4bn per day and has a total capitalisation of $403bn, Saudi Arabia it is yet not represented in any global index.
The country is actually defined as a frontier market but with a zero weight in the MSCI Frontier Markets Index, the same situation as Bosnia. But in contrast to Bosnia, the Saudi stock market is broad and with depth. In fact, some of the most exciting opportunities globally in retail, consumer goods, fast food, education and health care are found on the Saudi stock market. In addition, a tradition of family ownership and relatively easy access to management are some of the reasons we really like this market.
When launching the Frontier markets strategy in 2014, the stock market began to liberalise with the market finally opening up to foreigners during 2015, driving increased interest in Saudi stocks. The market was strong all the way to early summer 2015 and we used the strength to trim our Saudi positions as the weakening oil price provided a more challenging backdrop.
As the weak oil price started to affect the economy, not only in Saudi, but in the whole region, we were sitting on the sideline waiting for a possible entry point. At a visit in early March everyone spoke about a reform agenda to be presented with an overhaul of the economy.
In April 2016 ‘the Saudi vision 2030’ was finally presented by the Deputy Crown Prince, Mohammed bin Salman. This is a very ambitious reform program for the whole country and very well reflecting the willingness to change that we have observed during our visits there. The reactions from our talks with people this time was very positive. What is now outstanding are the key performance indicators that will be presented shortly outlining more clearly what needs to be done.
In the meantime, the Saudi economy is benefitting from a higher oil price, although the strain of the fall of the oil price during 2015 still can be felt in many sectors. Especially sectors dependent on state contracts are suffering a cash squeeze at present and construction and health care companies are reporting delayed payments since October 2015. This in turn means delayed salary payments, implying that the previous strong consumption growth has come to a halt. Especially the year-on- year figures look weak, which to some extent is explained by the extra monthly salary that the new king paid out early last year that almost immediately was spent.
However, overall we are turning more positive to the country again on back of the reform program but also thanks to less stringent rules for foreigners buying shares directly on the stock market, which is likely to transform into new investments. The announced listing of Aramco, making it possibly the largest company in the world in terms of market capitalisation, also means that all the world’s investment banks will have Saudi in focus for the coming years.
Peter Elam Håkansson on flight EK 820 between Riyadh and Dubai. He is chairman and chief investment officer of East Capital.