Saudi Stocks Are Currently 50% Cheaper Than Their 5-Year Average

Saudi stocks are currently 50% cheaper than their past 5-year average

Saudi Arabia (KSA) is showing steady signs of change, and the execution of reform is far quicker than what it used to be according to Hasnain Malik, the Managing Director of Dubai-based Exotix Capital, in a recent interview with Bloomberg. “Saudi stocks are currently 50% cheaper than the past 5-year average, on a price-to-book basis,” stated Malik.

Frontera looked at the forward valuations of the benchmark Tadawul All-Share Index, which is considered adequately representative of the Saudi Arabian stock market. Forward book value per share for the index has been following a rising trend over the past decade. And, the index’s forward price-to-book ratio is near its historically lowest level (see chart above).

Economy to benefit on a top-down basis

The steep decline in oil (USO) (OIL) prices since mid-2014 pushed many GCC (GULF) nations to once again begin looking at non-hydrocarbon growth strategies. While technology and mining are two key areas that are expected to gain under Saudi Arabia’s Vision 2030 reform plan, Malik sees much value in the banking sector.

Fund manager sees value in the banking sector

While the country’s overall transformation should benefit the Saudi Arabian economy on a top-down basis, the banking sector could outperform others. Malik’s case for investing in the sector rests on the fact that it is a safer bet in times of market uncertainty. The sector is expected to perform well regardless of any potential headwinds based on the following:

1. If growth picks up in Saudi Arabia, the banks would be there to provide the necessary liquidity to support loan growth in the economy, and on the other hand;
2. If the economy continues to struggle with growth, Saudi banks will derive gains from trade where they’re taking in deposits very inexpensively, and investing them in securities.

Moreover, banking is one sector in Saudi Arabia where valuation is currently down by historical estimates, with very attractive price valuations, as evidenced in Part 2 of this series.