Portfolio investments to dominate inflows into Saudi

Dubai: A steady flow of Eurobond issuance by Saudi Arabia, portfolio investments will be the main driver of foreign inflows to the Kingdom this year, said analysts at the Institute of International Finance (IIF).

“Despite the recent weaker performance of Saudi Arabia’s largest sectors — banking and energy — the rationale for investors’ interest in Saudi Arabia’s stocks can be explained by portfolio re-allocation benefits. Monthly returns on investment in Saudi Arabia’s stock index show lower sensitivity to other emerging and developed markets,” said Boban Markovic, senior analyst at the IIF.

With the local currency pegged to the US dollar and backed by large foreign reserves, analysts said exposure to Saudi Arabia’s market represents a natural currency hedge for investors.

Experience shows that equity markets frequently rally after upgrade announcements but retract after the upgrade itself. This pattern was seen in the UAE, Qatar, and Pakistan.

“While Saudi Arabia has shown a similar increase after the announcement, there is a reason to think that a major correction will not necessarily occur, unless global oil prices fall to well below $55 [Dh201.9] per barrel. First, foreign equity inflows remained high after the first phase of the upgrade. Second, the Saudi market is bigger, and more liquid compared to other markets in the region that joined the MSCI EM index recently. Third, many diversified portfolios are unlikely to ignore Saudi Arabia as the EM investment destination,” said Garbis Iradian, Chief Economist, Mena.