“Sell the news” could theoretically apply to the sudden rash of Saudi equity related articles of late highlighting bullish managers such as Mark Mobius and John Burbank (to that end we’ve been bulls for years; see archive) as well as the domestic Tadawal’s (TASI) underlying fundamentals including (i) a [forward] p/e of around 14.5 (all time historical highs are just over 15); (ii) a relative [dividend] yield versus local debt/peer payouts (i.e. ~0.6 percent on 1y government debt and a projected payout of 3 percent from the MSCI Emerging Markets Index, though admittedly myriad GCC countries sport a higher yield including Qatar, Abu Dhabi and Bahrain–all of which have lower premiums as well) and (iii) an impending invitation to foreign investors with an eye towards ultimately garnering MSCI ’emerging’ status.
That said even though the TASI looks to be stalling against 7800-8000 resistance after recently making 40-month highs, the long term retains its same promising premise–a fast growing (2.1 percent annual population growth versus the 1.2 percent global average) young and more economically/politically inclusive demographic underpinned by an oil and gas export-fueled investment boom that has spillover effects on other sectors (construction, building) and is itself a function of government spending, well capitalized banks (whose foreign liabilities have fallen in recent years against a large (15 percent) savings pool and moreover a generally non-interest bearing deposit base) with low exposure to European funding sources (and subsequent liquidity tightening) and an inherent competitive advantage particularly in the production of fertilizer, aluminum, steel and petroleum-based products. In a sense most if not all of these factors are intertwined and dependent upon one another, which is either comforting or not depending upon one’s perspective. Saudi PMI remains comfortably expansionary (~60) and in lockstep with aggregate demand/wage supportive fiscal spending (+ ~2.4 percent forecast in 2012 on top of a 23 percent increase in 2011), for instance, while credit volatility is also smoothed by the state via deposit growth. As I related to someone recently one cannot understate the role that public sector deposits in Saudi Arabia play in supporting liquidity. Over the past 5 years Saudi banks have exhibited loan to deposit ratios ~80 percent at extremely low volatility relative to GCC peers. However, even during cautionary periods for the sector (i.e. the latest European bank/funding crisis) wherein Saudi commercial banks have increased their central bank deposits, government deposits in the banking sector have risen in kind, smoothing an otherwise net contraction in credit growth (% change y/y government deposits with local banks have trended upwards since February 2010) as gross private sector credit continues to rise (to this end the latest consumer borrowing data sits at +21.8% y/y, a record high). The catalyst supporting the state driven dynamic is rising net foreign assets (NFAs) which in turn drives broad money growth (M3) and finally the money multiplier, meaning Saudi equities could theoretically still be ‘cheap’ for quite some time.