MubasherTrade Research, a unit of leading financial institution Mubasher Financial Services, has launched a list which highlights its top investment ideas across the Saudi market.

 The KSA Favourite List comprises 16 equally-weighted stocks, offering exposure to five sectors:

Consumer: Jarir, Shaker

Financials: Al Rajhi Bank, Riyad Bank, Samba Financial Group, Saudi Hollandi Bank

Industrials: Bahri, Saudi Ceramics, Saudi Steel Pipe

Materials: Hail Cement, SABIC, Sahara, Sipchem, Tasnee, Yansab

Telecom Services: Mobily
Foreign investors coming to town soon

Last month, Saudi Arabia revealed its intention to open up its $570 billion stock market to foreign investors in the first half (H1) 2015, after being restricted to GCC nationals, out of which foreign investors can only invest in Saudi shares  through financial instruments, such as swaps and exchange-traded funds (ETFs).

Reacting to the news, MSCI announced it will review the addition of Saudi Arabia as a constituent to either its Frontier or Emerging Markets indices once the long-awaited reforms are officially approved.

Based on two different scenarios, MubasherTrade estimates additional foreign inflows into the Saudi stock market (Tadawul) at $55 billion, noting an estimated current foreign ownership of 1.44 per cent of total market capitalization.

Saudi Arabia’s Tadawul index (TASI) trades at 2014e PER of 16.8x, a premium of 15 per cent above other Mena markets’ average of 14.7x. Only Dubai and Kuwait markets trade at a premium to Saudi Arabia (5 per cent or 2014e PER of 17.6x for the former; 2 per cent or 2014e PER of 17.2x for the latter).

According to MubasherTrade, there are three points to justify Tadawul’s relatively high valuation:

(1)    Expected double-digit earnings growth over the next two years (+21 per cent in 2014 with a PEG ratio of 0.8x and +13 per cent in 2015). Also, Saudi Arabia’s earnings beat-to-miss ratio has been on an uptrend since Q1 2013 for revenues and Q3 2013 for earnings, indicating that more recently companies are beating than missing analyst estimates, which suggests future earnings upgrades.

(2)     A highly liquid market (average daily turnover of USD2.4bn over the last six months, c.125 per cent higher than the average daily turnover of other Mena markets combined). As expected, the news that Tadawul will soon be opened to foreign investors, albeit with certain rules, drove the market higher on positive sentiment. Local investors bid the market higher beyond 10,000 – a technically important level – in hopes that foreign inflows will push the market even higher. Indeed, the market is up some 9 per cent since the announcement.

(3)    Recently high correlation between TASI and S&P 500 – add to Saudi Arabia’s strong link to the global economy –suggests the former’s high double-digit 2014e/2015e PERs are comparable to S&P 500’s 16.3x/14.7x. The correlation between the two markets has increased from 0.38x in the first five years to 0.45x in the latter five years of the last ten years. – TradeArabia News Service