Looking at Saudi Stocks? Forget Crude, Geopolitics Is King

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  • Oil, stock correlation turns negative by most since 2014
  • Anti-corruption probe, tensions in the region gain focus

Franklin Templeton's Kronfol on Saudi Reforms, Bonds

Investors in Saudi Arabia’s stock market are more concerned with political headlines coming out of Riyadh than oil prices.

Brent crude and the Tadawul All Share Index have recently gone opposite ways, contrary to the positive trend seen for the majority of the past two decades. The 120-day correlation between the oil exporter’s main stock gauge and the commodity became the most negative in more than three years, as this month’s anti-corruption arrests and increased tensions with Iran overshadowed a recovery in the price of the commodity.

“Recent geopolitical issues make retail investors more cautious,” said Jassim Al-Jubran, an equities analyst at Aljazira Capital in Riyadh. “Even with the recent increase in oil price, that has not been enough to increase appetite.”

The Tadawul has fallen 1.9 percent this month, compared with a 1.7 percent gain in the MSCI Emerging Markets Index. Brent last week reached the highest since June 2015, in part fueled by concerns stemming from Riyadh. It pared gains to $62.07 per barrel as of 4:22 p.m. in Dubai.

The local market regulator has frozen the trading accounts of the dozens of princes, billionaires and officials being detained or investigated as part of the kingdom’s crackdown on corruption, making them unable to buy or sell stocks in the local market, according to three people familiar with the matter.

Jaguar Growth Partners’ Gary Garrabant discusses the Saudi Arabian economy and talks about corruption in the Kingdom.

(Source: Bloomberg)

Even so, recent jitters caused by the political turbulence may be fleeting, according to Mark Haefele, the global chief investment officer at UBS Wealth Management in Zurich.

“Our base case is that the reform process continues in Saudi Arabia and that regional geopolitical tensions remain confined to exchanges of harsh rhetoric, allowing local financial markets and energy prices to stabilize,” Haefele wrote in a report to clients.

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