Mobius Leads Saudi Bulls on Volatility: Riskless Return
Money managers from Mark Mobius to John Burbank are bullish on Saudi Arabia, where stocks are producing the world’s best risk-adjusted gains in 2012 with lower volatility than longer-term U.S. Treasuries.
The BLOOMBERG RISKLESS RETURN RANKING shows the Tadawul All Share Index climbed 2.5 percent this year through yesterday after adjusting for price swings, the biggest advance among equity gauges in 73 nations, as oil rallied and speculation grew that the world’s biggest crude exporter will remove restrictions on foreign investors. Volatility in Saudi Arabia is the third- lowest among the world’s 25 biggest markets and dropped below that of the Bloomberg/EFFAS U.S. Government 10+ Year Index of long-term bonds for the first time since 1996.
The Saudi gauge rose on 76 percent of trading days this year as oil climbed more than 16 percent, financial stocks such as Allianz Saudi Fransi Cooperative Insurance Co. (ALLIANZ) rallied, the government boosted spending and investors speculated the country will allow overseas money managers to take direct stakes in local companies. While Shuaa Capital PSC predicts foreign investment will lead to bigger price swings, Mobius and Burbank, founder of hedge fund Passport Capital LLC, say the potential for further gains outweighs the risks when the market opens.
“There are a lot of good, interesting stocks in Saudi Arabia because it’s a very fast growing consumer market, young population, high growth, and of course lots of wealth that’s going to be distributed more and more,” Mobius, who oversees about $44 billion as the Singapore-based executive chairman of Franklin Templeton’s Emerging Markets Group, said in a March 23 phone interview. “It’s only within the last few years that we have had holdings there and we continue to increase our holdings.”
The Tadawul (SASEIDX) index rose 0.2 percent to 7,782.84 today.
Mobius, whose Luxembourg-based Templeton Frontier Markets (TEMFMAU) Fund has climbed 18 percent this year and outperformed 89 percent of peers, currently invests in Saudi Arabia’s $408 billion stock market through notes issued by local banks or brokers that are designed to track domestic shares.
Foreign investors outside the Gulf Cooperation Council countries can’t purchase Saudi shares directly. Instead, they access the market through derivatives, mutual funds or exchange- traded funds, according to Khaled Khattaf, a managing director at Nomura Holdings Inc.’s Saudi Arabia unit. The government allowed citizens of the neighboring GCC states to trade shares in 2007.
The risk-adjusted return is calculated by dividing total return by volatility. The returns aren’t annualized.
The Tadawul index’s volatility, or the degree of daily price-swing variation, has dropped to 9.1 this year from 20 in 2011, according to data compiled by Bloomberg. Only benchmark stock indexes in Malaysia and Chile had lower volatility among major markets tracked by Bloomberg in 2012.
The Bloomberg/EFFAS Treasury (USG5TR) index’s volatility slipped to 12 from 16 last year. Longer-term U.S. government bond yields have climbed this year after data showing the world’s largest economy is recovering. The Tadawul index has had a higher annual volatility than the Treasury gauge every year since 1996, according to data compiled by Bloomberg.
The Saudi stock index returned 22 percent this year including dividends through yesterday, compared with a 13 percent gain in the MSCI All-Country World Index. Egypt’s EGX30 Index advanced 38 percent for the top gain among equity indexes in emerging markets. Brazil’s Bovespa added 17 percent for the biggest increase among the so-called BRIC countries that also include Russia, India and China. On a risk-adjusted basis, the Bovespa rose 0.9 percent, less than half the Tadawul index’s gain.
Price swings in Saudi Arabia have diminished and shares have rallied amid increased investor confidence that the government will take steps to bolster economic growth, said Burbank, who oversees about $3.8 billion as founder and chief investment officer of Passport Capital, a multistrategy hedge fund in San Francisco.
The government announced a 2012 spending plan of 690 billion riyals ($184 billion), or 19 percent bigger than last year’s target, on Dec. 26. That follows a $130 billion stimulus plan to build homes and boost employment among the country’s 27 million people, measures unveiled in the first quarter of 2011 amid popular uprisings in Egypt and Tunisia.
Saudi Arabia, which holds the world’s largest proven oil reserves, has more than $550 billion of foreign assets, according to the country’s central bank.
The nation’s gross government debt amounts to 6.1 percent of gross domestic product, compared with a global average of 80 percent, according to the Washington-based International Monetary Fund. The economy may expand 3.6 percent this year after growing 6.5 percent in 2011, according to IMF estimates.
“I’m just as bullish” after the rally, Burbank, who invests in the Saudi market through notes and swaps, said in a March 26 phone interview. “This is just the beginning. It’s the belated recognition of the economic growth being faster and more dependable, given the government having such little debt and getting the resolve to redeploy oil surpluses.”
Burbank said high dividends make Saudi stocks attractive relative to local interest rates and shares in other developing nations. The Tadawul index has an estimated dividend yield of 3.4 percent, compared with a rate of about 0.6 percent on one- year government debt and a projected payout of 3 percent from the MSCI Emerging Markets Index, according to data compiled by Bloomberg.
Passport Capital plans to offer a new share class of its global fund starting April 1 to give investors access to just the Saudi stock market, according to a person familiar with the matter who declined to be named because the information is private. Passport, which slumped 18 percent in 2011, gained 3.7 percent this year through February, two people with knowledge of the matter said last week.
Steve Bruce, a spokesman for the firm, declined to comment.
The Saudi Arabian Capital Market Authority has held discussions with international banks to open the exchange to foreign investors this year, three bankers familiar with the matter said in October.
The market regulator said on Jan. 22 it will allow overseas companies to list securities in Riyadh. The move is a “genuine step” towards removing restrictions on foreign investment, said Ibrahim Masood, who helps manage about $400 million at Mashreqbank PSC in Dubai.
Raid Qusti, a senior media officer at the Capital Market Authority, declined to comment. Officials for the nation’s bourse didn’t reply to e-mailed requests for comment from Bloomberg News.
Investors who bought Saudi shares this year on speculation the government will soon relax restrictions on foreign investment may be disappointed, according to Slim Feriani, who oversees about $800 million as the chief investment officer at Advance Emerging Capital in London.
“It sounds like they are nearly there, the concern is that ‘nearly there’ could be more than a year, in which case maybe the market has run a bit ahead of itself,” said Feriani, who accesses the Saudi market through local investment funds. “From a timing point of view it’s a bit premature to price in a real opening in the next few weeks or months.”
Some of Saudi Arabia’s smallest companies by market value have led this year’s rally, a sign to Shuaa Capital’s Nadi Bargouti that the gains may be shortlived because speculators are driving the market’s advance. The 30-day average value of shares traded on the nation’s bourse has surged more than 150 percent this year, the second-biggest gain among the world’s top 40 markets after Dubai, data compiled by Bloomberg show.
Riyadh-based Allianz Saudi Fransi Cooperative Insurance, with a market value equivalent to $439 million, has surged 200 percent this year for the top gain in the Tadawul index. Saudi Public Transport Co. (SAPTCO), a Riyadh-based bus operator with a market capitalization of $600 million, climbed 97 percent.
Saudi Basic Industries Corp. (SABIC), the world’s largest petrochemicals maker with a market capitalization of $87 billion, has gained 13 percent. Al-Rajhi Bank, a Riyadh-based lender whose equity is valued at $33 billion, has increased 18 percent.
“The current low level of volatility is definitely not sustainable” in the next few months, said Bargouti, head of asset management at Shuaa Capital in Dubai. In the longer term, volatility will move higher as foreign investors play a bigger role in the market, Bargouti said.
Saudi stocks may retreat should tensions between Iran and western nations lead to a military conflict, said Yong Wei Lee, who helps oversee about $1.2 billion as a senior fund manager at Emirates NBD Asset Management in Dubai. Investor withdrawals from assets at risk in such a conflict would overwhelm the benefit from higher oil prices, Lee said.
U.S. President Barack Obama said March 4 he takes “no options off the table,” including a “military effort,” to stop the government in Tehran from obtaining a nuclear weapon.
Yasser Bu-Khamseen, a 30-year-old resident of Riyadh who works in the investment industry, said he invests a portion of his salary in the stock market almost every month. He’s avoiding “speculative” stocks in industries such as insurance and predicts petrochemicals companies and banks will benefit from increased investment by foreign money managers and the nation’s economic expansion.
“I attribute the recent advance in the Saudi bourse to the improved earnings outlook of major listed companies and the strong speculation about the market being opened for direct foreign investment,” Bu-Khamseen said in a phone interview.
Saudi Basic Industries, known as Sabic, is valued at 11 times estimated earnings, compared with a median of 13 times for global peers, according to data compiled by Bloomberg. Al-Rajhi Bank (RJHI)’s return on equity last year was 23 percent, twice as high as the MSCI All-Country World Financials Index’s 11.3 percent return on equity, data compiled by Bloomberg show.
“The macro and micro in Saudi Arabia continues to be strong and as such we expect this volume increase to continue,” Ahmed Beydoun, the Dubai-based head of equities for the Middle East and North Africa at Deutsche Bank AG, said by e-mail. “Stocks are still relatively cheap.”
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