Focus: Saudi Arabia

“In 2011 and 2012, the real GDP growth in the MENA region will average out at 3.4%, exceeding that of the G7,” says Fadi al Said, Head of Strategy at ING Investment Management.

Against a global back drop of the ongoing eurozone crisis, tepid US growth and Chinese slowdown, ING Investment Management believes that the outlook for Saudi Arabia in 2012 is expected to be characterised by an increased flow of IPOs and the long-awaited opening of the Saudi market to foreign investors.

Fadi al Said, Head of Strategy, ING Investment Management, says: “In 2011 and 2012, the real GDP growth in the MENA region will average out at 3.4%, exceeding that of the G7 which we predict will stand at 2.2%. In terms of Saudi Arabia, we were expecting that 2011 would witness a Saudi banking sector clean-up in terms of participation in large spending programs totalling more than $214bn. This would have represented a 38.6% increase above budget and while this has, in our opinion, happened, the loan book growth – although growing by 11% – did not take place in the significant manner we were projecting.”

The asset manager attributes this to the low profitability environment which prevented banks from putting their underutilised resources into the lending system – this is in spite of a cash ratio at above 10% as of November 2011. On this basis, the government has now taken the initiative to quicken projects implementation thereby avoiding the shy banking sector.

Fadi al Said continues: “Despite the government’s intervention, we see this funding arrangement changing – the certainty of project implementation has proven robust and the banks will eventually race towards lending to high quality counterparties. In an environment of prosperity driven by government spending, we expect a 10-15% loan-book growth range for next year.”

Turning towards consumer spending, ING IM highlights that the increase in GDP per capita – rising to $19,890 in 2011 from $14,148 in 2010 – has fuelled this part of the Saudi economy. Combined with increased education, it is directing spending not only to necessities but also to life enhancing auxiliaries. As a result, the Saudi retail industry experienced a substantial growth. By identifying the best relationship between growth and value, ING IM foresees good opportunities for alpha creation in 2012.

In terms of petrochemical companies, ING IM believes that the concept of the Saudi companies benefitting from cheap feedstock (input raw material i.e. oil) has been over told with the majority of the money flow, in fact, identifying top shelf stocks.

Fadi al Said concludes: “More research into specific catalysts related to capacity expansion or production derivation would surface a new scene of opportunities of uncommon names in the sector that would benefit from an equal realisation to their most popular peers or would be less affected in case of feedstock price increase. Hence second-tier players currently representing only 15.4% of the Saudi petrochemical industry total market capitalisation will contribute to around 36.4% of the country’s capacity expansion forecast for the next three years.”

Unfortunately, for investors looking to gain exposure to Saudi Arabia, Gulf and MENA economies, there is only a limited selection of ETFs to choose from – though further launches are anticipated.

HSBC Amanah Saudi 20 ETF (Tadawul: 9402)
Tracks the HSBC Amanah Saudi 20 Equity Index representative of Shariah-compliant, Saudi ‘blue chip’ company shares. TER 0.75%. (Potential restricted access)

RBS Market Access MSCI GCC Countries ex Saudi Arabia Top 50 Capped Index ETF (Xetra: M9S0)
Tracks the MSCI GCC Countries ex Saudi Arabia Top 50 Capped Index designed to measure the equity market performance of the Gulf Cooperation Council (GCC) Countries excluding Saudi. The index currently consists of securities from the following 5 countries: Kuwait, Qatar, the United Arab Emirates, Oman and Bahrain. TER 0.70%

Market Vectors Gulf States Index ETF (NYSE: MES)
Tracks the performance of the Dow Jones GCC Titans 40 Index, a modified capitalisation-weighted, float-adjusted index intended to give investors exposure to the investable Gulf States. Currently, these include Kuwait, Qatar, UAE, Bahrain and Oman. TER 0.98%. (N.B. This fund has UK Distributor status)

PowerShares MENA Frontier Countries ETF (Nasdaq: PMNA)
Tracks the NASDAQ OMX Middle East North Africa Index providing direct exposure to liquid stocks of companies that have the majority of their assets or services residing in MENA frontier market countries, which include Egypt, Morocco, Oman, Lebanon, Jordan, Kuwait, Bahrain, Qatar and United Arab Emirates (index currently includes the emirates of Dubai and Abu Dhabi). TER 0.70%.