Hermes’ Greenberg wants ‘real’ change before committing
History suggests underperformance after upgrade, Trustus says
While tens of billions of dollars gush into Saudi Arabia on a potential MSCI Inc. upgrade to emerging-market status, it will take more to keep investors enthused.
The Arab world’s biggest stock market will probably face difficulty in retaining foreign money unless companies become more transparent, according to some investors. Executives aren’t used to the level of scrutiny demanded by global funds as retail buyers, who typically focus on charts rather than financial analysis, account for about 75 percent of daily trading, according to Gary Dugan, chief investment officer at Dubai-based family office Namara Wealth Advisors Ltd.
Gary Greenberg, an investing veteran, isn’t joining the Saudi party. The London-based head of global emerging markets at Hermes Investment Management Ltd. wants more evidence of economic and political change as well as confidence in the rule of law as Crown Prince Mohammed bin Salman seeks to modernize the kingdom and wean it off its reliance on oil. Other investors including J O Hambro Capital Management are wary of adding to their emerging-market holdings as concern over the pace of U.S. policy tightening sent equities retreating from a multi-year high.
“The index-inclusion story merits a trade into the market, but in the absence of solid evidence of real change, it does not yet merit a long-term investment,” said Greenberg.
While foreigners currently own only 5 percent of Saudi Arabia’s $517 billion stock market, MSCI’s endorsement will draw more institutional money from abroad, diversifying the investor base. The index provider will probably upgrade the country to emerging-market status in June, with implementation starting next year, after a similar decision by FTSE Russell last month. It may attract inflows of about $50 billion, even before an expected initial public offering by oil company Saudi Aramco, which may be the world’s largest, according to Franklin Templeton Investments.
“Some of the best strategies I’ve seen in Saudi Arabia are very, very technical and nothing to do with the fundamentals,” said Dugan, previously the chief investment officer for wealth management at Emirates NBD PJSC, Dubai’s biggest bank. “A foreign investor would be well advised not to look at the intraday or daily volatility, but to believe that they’re holding a good quality company.”
Given the sparse research coverage, Saudi companies should start holding quarterly analyst presentations and provide forward-looking guidance to attract and retain foreign capital, according to M.R. Raghu, head of research at Kuwait Financial Centre SAK, which manages more than $3 billion.
“Otherwise, upon inclusion in the index, ‘curiosity capital’ can flow but will not stay,” Raghu said.
Qatar and the United Arab Emirates saw stock rallies fade after MSCI upgrades in May 2014, while Pakistan’s main index lost 15 percent last year after getting a similar boost. That suggests the flows that have propelled Saudi stocks to the highest since 2015 are also set to slow.
“If history is a guide, then we can also expect a period of underperformance of the market once the upgrade is effective,” said Marco Balk, a fund manager at Joure, Netherlands-based Trustus Capital Management BV, which invests in Saudi Arabia and other frontier markets.
Balk has found a way around the poor accessibility to management in the kingdom, using quantitative and qualitative analysis to select high-dividend stocks with above-average returns on equity. His investments in Al Rajhi Bank, Saudi Basic Industries Corp. and Saudi Telecom Co. have paid off as the stocks rallied.
“The issue of corporate governance and transparency exists not only in Saudi Arabia, but also in Vietnam, Africa and other frontier countries,” Balk said.
Saudi stocks have become more expensive at a time when investors are questioning whether the two-year rally in emerging-market assets will last. Saudi Arabia’s Tadawul All Share Index is trading at 15 times estimated earnings per share for the coming year, versus 12 times for the MSCI Emerging Markets Index. The gap between the measures is the widest since 2015.
“We are starting to get worried about the longevity of this cycle,” said Nudgem Richyal, a senior fund manager in Singapore at J O Hambro Capital Management. “We are not looking to add.”
While the crown prince’s plan to transform the kingdom and the prospect of MSCI inclusion have boosted the stock market, “the latter is more real,” said Greenberg, who previously ran his own hedge funds after a stint at Goldman Sachs Asset Management. The declared crackdown on corruption, which included the detention of dozens of the country’s rich and famous, has also “undercut the liberalization narrative that the crown prince disseminated on his recent world tour,” he said.
“Although the prince’s social initiatives are a breath of fresh air to the population — and we are confident in this after two recent visits — his economic initiatives leave us less confident,” Greenberg said.
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