Saudi Arabia – undervalued and underowned until now?

29th July 2014

Jan Dehn, Head of Research at Ashmore discusses the investment opportunities presented by the under-valued, under-owned and, until now, under the radar Saudi Arabia equity markets along with the situation in Argentina  and the changing political landscape in Indonesia.

Saudi Arabia

Saudi Arabia is opening its equity markets to foreign direct investment. Saudi Arabia is a very large, liquid market. The Tadawul All Share index comprises over 160 companies with a total market cap of USD 530bn and a USD 2.2bn average daily trading volume (last 3 months) – this is on par with the likes of South Africa and Malaysia, and larger than either Turkey, Indonesia or Mexico.

Saudi companies offer a rich selection of opportunities from banks to consumer-driven businesses. Due to lack of index inclusion, valuations are at a discount (and at times a significant one) to their peers in other markets. There are no listed oil companies in the Middle East and in any case energy stocks only make up 2% of the region’s equity markets, primarily exploration and production outside the region. We continue to see positive earnings results from companies in Saudi Arabia.


As of Monday morning this week, there was no material progress in the stand-off between holdout investors and the government. In a hearing chaired by Judge Griesa last week the two parties were ordered to hold continuous talks, while Argentina’s request for a suspension of the ruling that Argentina must pay holdout investors was denied by the judge. Argentina has already sent funds to service performing bonds, but Judge Griesa refused to allow the payment agent either to pay holders of performing bonds or to return the money to Argentina. Judge Griesa also revealed last week that he had not previously been aware that a good portion of the exchange bonds (those bonds subject to dispute between Argentina and holdout investors from the default in 2001) were issued under various laws other than New York law, including Argentina, English and Japanese law.

This further complicates the picture as the grace period for the 2033 Discount bonds draws nearer; it expires at midnight on 30 July 2014. Meanwhile, the cash to service the bonds just sits on account at Bank of New York Mellon. Argentina has on many previous occasions stated that it will not pay holdout investors. This is partly for domestic political and legal reasons, partly due to the size of the total claim (approximately USD 15bn) and partly due to the so-called RUFO clause, a provision in the existing bonds that requires any offer made to holdout investors also be extended to holders of performing bonds. This clause expires at year-end, or in the event that the bonds are accelerated. Argentina has also on previous occasions stated publicly that it would offer to swap New York Law bonds for local law bonds in the event it becomes impossible to service New York Law bonds.


Joko Widodo, aka Jokowi, won the presidential election in Indonesia with a convincing 6% margin over his main challenger. The result was more decisive than expected and attention will now shift to cabinet appointments and the economic and political reform agenda. Jokowi never expressly defined a program ahead of winning power, so there is considerable uncertainty about what to expect. More importantly, however, is the question of parliamentary coalitions. Based on his record as governor of Jakarta, Jokowo is likely to be very hands-on and should pursue better monetary and fiscal policies than in the previous administration, but we believe his scope to reform will depend crucially on his ability to negotiate alliances in parliament. This, then, is the area of focus right now in Indonesia.

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