Saudi Arabia’s potential inclusion in the MSCI emerging markets index continues to make Bank of America Merrill Lynch (BofAML) bullish about publicly traded companies despite a recent anti-corruption drive that has unnerved investors.
"Higher oil prices support government efforts to lengthen the timeline for fiscal consolidation," said Jean-Michel Saliba, Middle East and North Africa economist and strategist at BofAML. "The recent anti-corruption drive may dampen near-term sentiment but is likely to provide further impetus to ensuring success of reforms and stable energy policy."
Saudi Arabia moved to quell investor fears last week, saying it was committed to safeguarding the rights of investors in the wake of an anti-corruption campaign that has seen the detention of prominent businessmen including the billionaire Prince Alwaleed bin Talal.
The country's council of economic affairs, presided by its chairman Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud, also stressed the Saudi Arabian government was committed to protecting the rights of individuals under investigation.
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BofAML said however it didn't expect that the confiscation of any assets would boost foreign exchange reserves. The investment bank said its analysis of money held by the Saudi Arabian private sector and banks at the end of 2015 was estimated to be no more than $100 billion but that only a small proportion may end up going back to state coffers.
“We would only expect only a small fraction of that to be at risk within this probe, and expect assets frozen to include material domestic holdings,” Mr Saliba said. “Assets being confiscated will likely require proof of links to corrupt practices and may this end up being a fraction of total assets frozen.”
The arrest of Prince Alwaleed prompted a sell-off in shares of his investment vehicle Kingdom Holding. Shares of Kingdom Holding tanked to their lowest level since 2011 after his arrest and prompted a wider sell of shares listed on the Saudi Arabian stock exchange.
Still, BofAML said it remained upbeat about Saudi Arabian equities ahead of the possible inclusion of the country's stocks in the benchmark MSCI Emerging Market index next year and the FTSE emerging market index. The investment bank also cited accelerating growth in the country's non-oil economy as well as the rebound in oil prices as reasons for its optimism. Nonetheless, it said a number of risks related to the pace of reforms could create volatility for equities.
“Given the emergence of a number of risks, we believe appetite for the Saudi market could be tempered in the near term,” the bank said. “These include heightened geopolitical risks and lack of clarity on the pace of reform. As such, we view it unlikely the market will outperform peers till greater comfort is obtained on these issues, which we see emerging towards the end of the year when the 2018 budget is presented.”
