Domestic markets best for Mena investors, says expert

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• Global investors underweight on Gulf equities, says Salah Shamma
• But they should be reassured by reforms to state finances
• Saudi’s demographics present big opportunities for growth

Gulf stock markets bucked a worldwide trend in 2022. While the MSCI Emerging Market index lost 20 per cent over the year and global stock and bond markets were engulfed by gloom, equity benchmarks in Saudi Arabia and Abu Dhabi reached multi-year peaks in May and November, respectively.

This year the mood has been more jittery. Four months into 2023, the Qatar, Abu Dhabi, Kuwait and Oman indexes are all in the red. Only the Saudi bourse is in positive territory, having risen by around 6.5 percent after hitting a two-year low in March.

Salah Shamma, head of Mena equities for asset manager Franklin Templeton, points out that global investors remain underweight on Gulf equities, despite the region representing around 7.5 percent of emerging market benchmarks.

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International investors have traditionally viewed Gulf stock exchanges through the prism of the oil price. But from 2016 to 2019, while oil prices were low, Gulf governments made reforms to address structural imbalances. These have served to put state finances on a stronger, more sustainable footing, according to Shamma, and should underpin market performance.

“As the structural growth story plays out, we should expect foreign participation to increase. That could bring in substantial new liquidity,” he told AGBI.

Economic growth is likely to slow across the Gulf this year, S&P forecasts, although Saudi and the UAE will again be the regional standouts, expanding by 4 percent or more.

That follows robust growth in 2022. Real GDP in Saudi Arabia and the UAE expanded by 8.7 and 7.6 percent respectively in 2022. The increases in Qatar, Kuwait, Oman and Bahrain ranged from 4.3 to 5.9 percent, according to S&P Global.

Saudi Arabia’s demographics present an opportunity, according to Shamma. The kingdom’s birth rate was 2.5 children per woman in 2020, according to the World Bank.

Only Oman – with a rate of 2.7 – was higher in the Gulf. Saudi’s median age, meanwhile, is 31.8, and three-quarters of the kingdom’s population is under 35, according to Princess Reema bint Bandar, Saudi’s ambassador to the US.

“We’re excited about the demographic story, especially in Saudi Arabia,” said Dubai-based Shamma, whose firm has $1.5 trillion in assets under management.

“As that population ages, there will be huge demand for goods and services within the kingdom.”

This means stocks that serve domestic economies are likely to be attractive.

“Whether it’s in the consumer space, retail, education, healthcare – these are all sectors that will benefit from population growth and the youth bracket coming of age,” he added.

Higher female employment in Saudi Arabia will also boost overall productivity, individual income and consumer spending.

“This further supports a robust and interesting proposition for consumer-focused companies in Saudi.”