A recovery in oil prices and plans to increase fiscal spending in Saudi Arabia raise the scope for a better growth outlook into 2019, Credit Suisse said in a report.
“Saudi Arabia has potential to be among top 10 equity markets over medium term, and its EM upgrade by FTSE and MSCI is expected to drive significant returns,” said Fahd Iqbal, head of Middle East Research, Credit Suisse.
“Saudi’s staggered entry into EM and the overlap between FTSE and MSCI means that it is difficult to predict exactly when its relative performance will peak, but we expect it to be around Q2 2019,” he added.
Saudi Arabia has accounted for the lion’s share of foreign investor inflows into the Gulf, though in recent weeks there has been some reversal, according to the report.
The Kingdom’s inclusion in MSCI and FTSE EM indices in 2019 remains the key driver for investment, with Saudi valuations set to stay elevated following the EM upgrade announcement.
“Although valuations are not cheap, we note that Saudi Arabia is still trading below previous peaks in absolute and relative terms,” the report said.
Much of the richness in relative P/E terms is due to recent weakness in the EM space, which can reverse once trade tensions dissipate. Foreign ownership is still 5 percent of market cap while share of trading averages well below 5 percent.
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