Saudi Arabia among ‘hottest’ emerging markets globally as IPO flurry begins: analysts

Riyadh city

Saudi Arabia is currently one of the “hottest” emerging markets globally, given the benchmark Tadawul All Share Index (TASI) surged 27% year-to-date, Junaid Ansari, Head of Investment Strategy & Research, Kamco Invest, told Argaam.

Several reforms have been announced under the Vision 2030 strategy lately on various fronts, including economy, labor and financial markets.

The reforms aim at building a robust economy, ensuring investor safety and creating an active market for raising funds, Ansari said, stating the efforts were reflected in unemployment rates dropping to the lowest in five years.

Yogesh Khairajani, Global Market Strategist, Century Financial, noted that Saudi IPOs enjoy some tailwinds, as the population is enthusiastic about stocks following the successful Saudi Aramco’s initial public offering (IPO) in late-2019.

“Access for foreigners has improved, too, since Saudi Arabia joined the MSCI Emerging Markets Index last year. Some 3,000 global firms are now approved for trading. Another benefit is the Saudi Riyal's peg to the US dollar, which removes the currency risk that hangs over most emerging markets,” he noted, expecting more than 10 listings this year.

Ahmed Saleem, Associate, SHUAA Capital Saudi Arabia, said that the Kingdom is poised to become a very attractive emerging market globally if the transformation program is implemented successfully and the government’s efforts, along with the regulator’s effective oversight, manage to achieve the intended goals.

Saudi Tadawul Group Chief Executive Officer (CEO) Khalid Alhussan recently said that the Saudi market witnessed 25 listings in the last three years and received new 25 listing applications this year.

Taking the lead

With a market capitalization of $2.5 trillion, the Saudi Exchange (Tadawul) is the Arab world’s largest stock exchange. The bourse was MENA’s top listing venue for 2020, with four listings

totaling $1.45 billion, representing 78% of the total amount raised by MENA IPO candidates in 2020.

In the past few weeks, the Capital Market Authority (CMA) approved several IPOs, including ACWA Power, stc solutions, Arabian Contracting Services, etc.

"We believe that the announcements of new IPOs and listings on Tadawul reflect investor’s confidence in the economic progress in the Kingdom, as well as the fact that the current levels of the market will give an appropriate valuation for the offerings," Ansari noted.

The new listings will increase the market depth essential for offering institutional investors within the Kingdom, region and abroad a deeper exposure to the economy, he added.

“Trading activity and liquidity are expected to remain upbeat on the exchange, and this will encourage even dual listings from companies from other regional exchanges.”

Khairajani said that the CMA wants to encourage private companies to list on Tadawul, establish Nomu - Parallel Market, and develop regulatory principles to encourage foreign companies to offer shares and raise capital before 2023.

“The CMA’s major goal is to enhance the Saudi stock market globally and make it the most important in the Middle East. It also aims to attract foreign investors and diversify investment opportunities; the core mission of Vision 2030's plan to modernize the economy and reduce dependence on oil,” Khairajani asserted.

Saleem said the market breadth is bound to enhance since a significant increase was observed in the listings on the main market and Nomu.

The depth, however, will depend on the investor sentiments and confidence that will drive the direction of liquidity in the markets, he said.

Gaining momentum

Earlier this month, TASI crossed the 11,000-point mark, reaching the highest level since 2014.

“All the sectoral indices are in the green in terms of year-to-date performance, and further gains would be subject to Q2 2021 results. We believe that the market would remain stable over the near term as we don’t see any earnings shock,” said Ansari.

Nonetheless, the trend in oil price, which contributed to much of the gains on the index, will be a key factor in determining the economic impact, he added.

Khairajani echoed the same sentiment, stating Tadawul topped 11,000-mark for the first time in nearly seven years, a milestone achieved as rising crude prices and the prospect of faster growth fanned investor confidence ahead of first-half earnings season.

In addition, business conditions in Saudi Arabia have now improved in each of the past 10 months as its non-oil economy recovers from the COVID-19-induced slowdown.

As oil prices hit a two-and-a-half-year high and upbeat investor sentiments reflected in announcements of new IPOs and listings on the exchange, a break above the 2006-high of 11,300 points for TASI could indicate a strong momentum and perhaps take the index above the crucial 12,000 mark, he noted.

Although the market has responded significantly above expectations in the last 12 months, Saleem believed it will be difficult for the market to maintain the overly ambitious momentum.

“There are a few sectors that are likely to present upward potential such as petrochemicals (due to crude price expectations but OPEC+ disagreements may hamper that), hospitality and tourism (contingent upon the global situation of COVID-19) and cement,” he concluded.

To contact the writer, email Parag Deulgaonkar at parag.d@argaam.com