Profit Outlooks Give Life to Bottom-Dwelling Saudi Shares

  • Earnings estimates rise as recovery beats expectations
  • Tadawul still among world’s worst performers this year

Saudi Arabia is working its way out of an economic slump faster then expected, prompting analysts to upgrade earnings estimates for stocks in the world’s largest oil exporter.

Twelve-month profit expectations for members of the Tadawul All Share Index have climbed to the highest level since November, while the index has dropped 4 percent since Jan. 1. That’s made the benchmark the cheapest relative to emerging markets in six months. The gauge’s slump ranks it among the world’s five worst performers, bucking a 15 percent rally that has marked the best start to a year for emerging stocks since 2009.

Companies in the Middle East’s biggest economy are riding the coattails of growth that’s expected to accelerate three-fold over the next year as the government tackles its budget deficit with international bond sales. Of Tadawul companies that have first-quarter earnings estimates on Bloomberg, more than half have beaten expectations.

A good example is the banking industry, according to Jaap Meijer, the Dubai-based head of equity research at Arqaam Capital Ltd. Saudi lenders, including the two biggest by market value, Al Rajhi Bank and National Commercial Bank, defied “overly bearish” forecasts and delivered estimate-busting results for the first three months of the year, said Meijer. He turned overweight on the country’s banking and insurance stocks at the start of 2017. Al Rajhi is among Arqaam’s top-four recommended financial shares in the Middle East and North Africa region.

King Salman Bin Abdulaziz surprised Saudis last month by reinstating bonuses for public employees that were suspended in September, after the nation’s budget reflected half the expected deficit in the first quarter, even as oil prices languish around $50 a barrel. Retailers’ shares have since soared, climbing 12 percent after trading almost flat since the start of the year. The Tadawul, by comparison is up just 0.5 percent.

The benchmark index, which has historically traded at a premium to MSCI Inc.’s emerging stocks index on a forward price-to-earnings basis, has seen that advantage narrow to 1 multiple this week.

Investors will have their sights set on a potential announcement by MSCI next month that it’s starting the process of including the $431 billion bourse in its developing-markets indexes. FTSE Russell said this week that regulatory changes implemented in Saudi Arabia give its market a better chance for inclusion in its emerging stock indexes than China’s A shares when a decision is made in September.

Read More: Why Saudis’ MSCI Bid Matters And What They’ve Done to Get It

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