Saudi shares sell-off provides opportunity

Amid sharp falls in equities in Saudi Arabia, the region's largest stock market, large investors are eyeing opportunities in cheap stocks.

Saudi Arabia's Tadawul All-Share Index suffered dramatic declines this week, with traders selling out of shares in a seeming panic.

But now institutional investors are starting to look at opportunities in consumer-related companies.

Retail investors drove the sell-off, but institutional investors believe corporate earnings are unlikely to be materially affected by events in other parts of the Mena region. This should offer compelling entry points on consumer names such as Savola and Almarai, said Tariq al Alaiwat, an analyst at NCB Capital.

Institutional investors have been buying selected names given the low prices, Mr al Alaiwat added.

The Tadawul All-Share Index lost more than 20 per cent of its value in the past week, down to its lowest since July 2009. It is trading below 14 times earnings, compared with a historic average price to earnings ratio of 20.

Savola dropped 9 per cent on Wednesday, extending losses made earlier in the week and adding to cheap valuations of the company.

Retail has been identified as one of the best value sectors on the stock market, and is trading at about 12.6 times earnings.

"We believe long-term investors should take advantage of the current market weakness in establishing inexpensive entry points," Mr al Alaiwat said.

Petrochemicals shares are trading at 14 times earnings, telecommunications at 11.8 times and dividend yields on many stocks are now also quite compelling.

Even large government agencies, which have not been active in the market over the past six months, bought at least 589 million Saudi riyals in securities last month, data from NCB Capital show.

Analysts say the positive valuations of these companies should be considered carefully, particularly concerning consumer-related companies in the context of soaring food prices that cut into margins. The FAO Food Price Index, which measures the wholesale price of a basket of basic foods, averaged 231 points last month - its highest level since records began in 1990.