Saudi Arabia's equity market is trading at attractive valuations, says BofAML

Tadawul is benefiting from government reforms, oil price hike

(FILES) This file photo taken on December 14, 2016 shows a Saudi investor inspecting the stock exchange monitors at the Saudi Stock Exchange, or Tadawul, in the capital Riyadh.
Shares in Kingdom Holding, 95 percent of which is owned by billionaire Prince Al-Waleed bin Talal, dived 9.9 percent as the Saudi stock exchange opened on November 5, 2017 after reports of his arrest. The Saudi Tadawul All-Shares Index (TASI) also dropped 1.6 percent only a minute after the start of trading on the Arab world's largest stock market following a sweeping crackdown on corruption that saw the arrest of leading royals and businessmen. / AFP PHOTO / FAYEZ NURELDINE
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Saudi Arabia's stock market, the Arab worlds’ largest, is attractive thanks to its current cheap valuation compared to other emerging markets equities as well as the government’s economic reforms and possible inclusion in two-widely tracked indices, according to Bank of America Merrill Lynch.

The kingdom's equities are trading at a 3 per cent premium to global emerging markets (Gems), compared with a historical premium of more than 30 per cent, the bank said in a new report. The Tadawul market is also trading at an 11 per cent discount to its longer term average.

The kingdom's stock exchange, is benefiting from government reforms that will help lift non-oil growth and higher oil prices that will buoy the economy overall, the report said.


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Saudi Arabia, the Arab world's largest economy, is undertaking various reforms to diversify its economy, lower its dependence on oil, narrow its fiscal deficit and propel growth. The kingdom announced the biggest budget ever for this year, with a 200 billion riyal stimulus programme, and the granting of bonuses to public sector citizens. These measures will help return the country to growth in 2018 after contracting 0.5 per cent last year because of fiscal consolidation and lower crude output due to the kingdom’s adherence to a global oil deal.

“The Saudi market has underperformed Gem peers by [around] 4 per cent YTD [year-to-date] and 42 per cent since the beginning of January 2017,” said the report. “This comes despite improving earnings expectations (the earnings revision ratio has been consistently above 1 since July, indicating more upgrades than downgrades), rising dividend yields (driven by higher pay outs), a more healthy oil back drop and the recently announced expansionary budget."

Also, Saudi Arabia is expected to be included in the MSCI Emerging Markets Index, which could attract $30 billion of inflows, and FTSE EM Index, the report said.

Bank of America Merrill Lynch is bullish on bank and petrochemical stocks, with its top picks lenders Al Rajhi and Samba, and Yansab and Sabic for petchems.