Foreign traders’ Gulf stock sell-off good news for bargain hunters

Noushad Thekkayil via Reuters Connect

• Sellers unload $597m in Gulf shares
• Chance to buy back at lower prices
• ‘We expect foreign money to return’

Foreign investors’ recent cutting of their holdings in Gulf stocks should prove fleeting, and the sell-off provides other traders with the chance to accumulate equities at lower prices, fund managers told AGBI.

Non-Gulf investors were net sellers of $597 million of Gulf-listed stocks in April, a report by the Dubai-based consultancy company Iridium revealed. Of this total, $409 million was in Saudi stocks, followed by Kuwait ($97 million), the UAE ($49 million) and Qatar ($35 million).

“These shifts are indicative of broader market responses to the danger of escalating tensions in the Middle East and the challenging global economic climate,” Iridium wrote.

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Foreign investors are net buyers in 2024 overall despite their April sell-off, says Akber Khan, acting chief executive officer of Doha’s Al Rayan Investment.

“They’ll probably remain net buyers for a long time to come, because they are structurally underweight [on] a region whose weight in emerging market stock indices keeps creeping higher,” Khan says.

This is partly because of Saudi Aramco. The state oil company represents a sizeable chunk of the MSCI Emerging Markets Index, but it is expensive relative to other major energy companies’ stocks and provides relatively subdued growth.

Because of this, Khan says, global emerging market investors tend to not invest heavily in Aramco, preferring rival oil producers’ stocks instead.

Faisal Hasan, chief investment officer at Dubai’s Al Mal Capital, says: “There’s churn from the Gulf to international markets, which have been performing more strongly on a comparative basis, but we shouldn’t read too much into that.”

Foreign investors remain interested in Gulf stocks despite their recent sell-off, Hasan says.

“We expect foreign money to return. The recent downturn will provide an opportunity to buy back stocks at lower valuations,” he says. “The Gulf’s macroeconomic profile is strong and there are no major inflationary concerns.”

As of May 23, Saudi Arabia’s stock index was near-flat in 2024, Dubai was down 1.3 percent, the FTSE Qatar Index had lost 12 percent, Kuwait’s BKM50 benchmark had gained 6 percent and Oman was up 6.5 percent.

Yet comparing markets according to arbitrary milestones such as year-to-date performance can be erroneous, Khan warns. He says if one takes instead the movement of the various bourse benchmarks since October 31, the numbers are markedly different.

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Qatar is down only 1.2 percent, Kuwait is 13 percent higher and Saudi Arabia has gained 12 percent.

Saudi Arabia’s bourse nonetheless declined over the past few weeks as foreign investors sold after a slew of negative news reports about the progress of the country’s giga-projects.

“You cannot execute transformative and dramatic change without setting very aggressive targets. If you miss these targets, but achieve reasonable progress, you will still have done an excellent job,” Khan says.  

“We’ve always believed the targets that Saudi had set were aspirational rather than definitive so have discounted them by anything from 30 to 60 percent depending on the project.

“Despite that, we see compelling reasons to invest in many Saudi stocks. For a medium to long-term investor, Saudi is a fantastic market. No other G20 economy will see a transformation like Saudi over the next decade.”

Doubts have also emerged over the ability of Saudi Arabia’s banking sector and government finances to fund the kingdom’s vast project pipeline.

“When earnings multiples increase so significantly in such a short period, it is not surprising to see investors take some profits,” Khan says.

“The economic changes in Saudi won’t be played out in six or nine months – these are five-to-10-year trends.

“That doesn’t mean five to 10 years of positive stock market returns every quarter or year. There will be volatility, but over the medium term, we expect companies across numerous sectors in the non-oil economy to show very strong growth.”