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Abu Dhabi, UAETuesday 11 December 2018

Local funds positive on Saudi Arabia after corruption crackdown

Fund managers looking to opportunities from economic reform programme

Saudi crown prince Mohammed bin Salman is spearheading the country's economic reforms. Fayez Nureldine / AFP Photo
Saudi crown prince Mohammed bin Salman is spearheading the country's economic reforms. Fayez Nureldine / AFP Photo

Middle East fund managers have become more positive towards Saudi Arabian equities after authorities launched a sweeping crackdown on corruption, a monthly Reuters poll showed on Thursday.

Forty-six per cent of funds now expect to raise their allocations to the Saudi stock market in the next three months and none to reduce them, according to the poll of 13 leading managers, conducted over the past week.)

That is the most bullish bias towards Saudi stocks since July, and compares with ratios of 31 per cent and 8 per cent in last month's poll, just before the purge was announced.

The crackdown, in which dozens of princes, senior officials and top businessmen were detained and over 2,000 bank accounts frozen, alarmed the stock market because of its potential to damage the economy and undermine companies linked to suspects.

As a result, foreign investors were net sellers of stocks in the first three weeks of this month, exchange data shows. They were also concerned by rising tensions between Saudi Arabia and Iran, fuelled by instability in Lebanon.

But many fund managers said they were looking past the short-term instability caused by the corruption crackdown to possibilities created by Saudi Arabia's economic reform programme, including privatisations, big new development projects and the plan to lift a ban on women driving next year.

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"The crackdown on corruption that we witnessed earlier this month, along with escalated tensions between Iran and Saudi, pushes us to be cautious about our overall Saudi exposure," said Dubai's Arqaam Capital.

However, it added: "Short-term uncertainties are concerning, but our long-term view is net positive when putting together reform initiatives and liberalisation efforts."

The non-oil part of the Saudi economy is barely growing this year and is not expected to fare much better next year because of the planned introduction of a 5 per cent value-added tax.

But the government is expected to increase spending on development projects moderately in 2018 — perhaps relying in part on funds recovered in the corruption crackdown — so some funds are starting to look towards an economic recovery in 2019.

Sachin Mohindra, portfolio manager at Abu Dhabi's Invest AD, said that while economic, regulatory and social reforms in the region as a whole would sustain growth in the long term, for now "we expect regional investors to continue to exercise a lot of caution and volumes to remain subpar relative to history."

Meanwhile, 38 per cent of managers expect to raise equity allocations to Egypt and 15 per cent to reduce them, compared to 23 per cent and 8 per cent last month.

This week Egypt's stock market hit a record high after the central bank removed caps on deposits and withdrawals of foreign currency for importers, scrapping one of the last currency controls in place since the Arab Spring uprising triggered an economic crisis in 2011.