The rally that sent Saudi shares to a six-year high has further to run as the kingdom prepares to open its market to foreign trading next year, according to Renaissance Capital Ltd.
Even after the biggest weekly surge in the Tadawul All Share Index in 10 months, the CHART OF THE DAY shows prices at 15.1 times 12-month estimated earnings remain below valuations in the neighboring United Arab Emirates and frontier markets such as Nigeria and Vietnam. Meanwhile, Saudi Arabia scores highest on RenCap’s “Macro Index” based on its economic growth outlook, demographics, indebtedness and credit ratings.
“It’s worth buying Saudi stocks on value terms because the macro is so strong,” Charles Robertson, the chief economist at RenCap in London, said by phone on July 24. “I wouldn’t be surprised to see a relative bubble emerge ahead of the formal opening of the market.”
The Saudi regulator will publish rules next month allowing the first purchases by qualified foreign financial institutions from the first half of 2015, the Capital Market Authority said on its website July 22. Before then, overseas investors can access the market by buying so-called participatory notes and exchange-traded funds. P-notes for Saudi stocks cost about 0.5 percent, according to London-based Exotix Ltd.
While shares in Kenya are cheaper at 14.6 times projected 12-month earnings and analysts forecast faster economic growth, the African nation has higher debt relative to its gross domestic product and is less stable politically, according to RenCap.