Biggest MSCI Emerging Hopeful Falters as Saudi Profits Stall

  • Saudi Arabian stock valuations climb as oil slump hits profits
  • Tadawul’s average earnings estimate lower versus a year ago

All it took was five trading days.

That was the time EFG-Hermes Holding SAE needed to go from overweight to underweight on Saudi Arabian shares after they were added to MSCI Inc.’s list for potential classification as an emerging market. The reasons: flat company earnings and excessive valuations.

Analysts have been slow to raise profit estimates for the $463 billion exchange -- the biggest among markets seeking emerging status on MSCI indexes -- as the kingdom struggles to diversify its economy away from oil amid low crude prices. While developing nation stocks have posted an 18 percent increase in 12-month forward earnings estimates over the past year, Saudi profit expectations are down 0.4 percent over that period.

“We need to see more non-oil revenues, which would hopefully trickle down to improve economic growth and company earnings,” said Mohamad Al Hajj, equities strategist at EFG-Hermes in Dubai, referring to the cost of Saudi stocks relative to company profitability. “Without earnings growth, you can’t continue to rely on multiple expansion to drive performance.”

A flurry of retail investor buying following MSCI’s decision in June has made Saudi shares among the most expensive in the developing world, diminishing their appeal even as officials implement measures to boost government revenue and revive economic growth. Those reforms include adopting a value-added sales tax, collecting fees from foreign residents and preparing what could be a record initial public offering when it sells shares next year in its crown jewel, state-owned Saudi Arabian Oil Co.

The benchmark Tadawul All Share Index is trading at 13.7 times estimated future earnings, more than a multiple higher than emerging peers and almost on par with South Africa, a similar-sized market that has seen expectations for its companies’ profits jump 14 percent over the past year.

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