Mideast funds positive on Saudi equities after corruption purge: poll

Middle East fund managers have become more positive toward Saudi Arabian equities after the Kingdom’s recent crackdown on corruption, a monthly Reuters poll showed.

Out of 13 leading managers taking the survey, 46 percent of funds expect to raise their allocations to the Saudi stock market in the next three months and none to reduce them. That reflects the greatest optimism towards Saudi stocks since July, and compares with ratios of 31 percent and 8 percent in last month’s poll, just before the purge was announced.

Saudi authorities have arrested dozens of princes, senior officials and top businessmen, and over 2,000 bank accounts were frozen, which 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. They were also concerned by rising tensions between Saudi Arabia and Iran, fueled by instability in Lebanon.

However, many fund managers said they were looking past the short-term instability caused by the corruption crackdown, as they focused on the opportunities created by the Kingdom’s economic reform program, including privatizations, big new development projects and the plan to lift a ban on women driving next year.

“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. “Short-term uncertainties are concerning, but our long-term view is net positive when putting together reform initiatives and liberalization efforts.”

The non-oil sector 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 percent value-added tax (VAT).

But meanwhile, 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.

“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,” said Sachin Mohindra, portfolio manager at Abu Dhabi’s Invest AD.