As the Iran war erupted, Gulf stock markets looked certain to tumble once trading resumed. But Saudi equities have defied those expectations to rise despite the conflict, helped by support from local investors.
Riyadh’s Tadawul All Share Index is 1.7% higher than before the war started two weeks ago. By contrast, the Dubai Financial Market index has plunged by about 17%, as Iranian missiles and drones struck targets across the region and traffic through the Strait of Hormuz ground to a near halt.
Saudi Arabia’s stock market has swung from being one of the region’s laggards before the war to an outperformer, as domestic investors flip from sending capital abroad in favor of supporting local equities instead. The Tadawul has also been buoyed by gains in Saudi Aramco. The oil company accounts for 16% of the benchmark and is up 7.6% in March.
In the week ended March 5, Saudi investors’ share of the main Riyadh market free float crept up to 85.81% from 85.65%, according to data from the bourse. That suggests a long-term trend of rising foreign ownership in Saudi stocks has paused.
Saudi corporate investors accounted for the largest purchases during that week, increasing their holdings by 0.40 percentage point to 40.57%.
Before the conflict, influential Saudis had been encouraged to play a bigger role in partnering with global investors to attract money to the kingdom. The Public Investment Fund gathered about a dozen prominent families for a summit on the Red Sea in December to assess their appetite for participating in future opportunities.
Saudi corporates and government-related entities were net buyers of around 3 billion riyal ($800 million) of domestic equities in the week ended March 5, said Naresh Bilandani, head of CEEMEA equity research at Jefferies. “Considering that Saudi institutions have generally been net sellers over the past 12 months, the reversal in their behavior is perceived as a supportive signal.”
While United Arab Emirates nationals have also stepped up buying of stocks in Dubai, the effect has been more muted. UAE citizens were net purchasers of 2.2 billion dirhams ($611 million) of stocks in the first 13 days of March, according to figures from the exchange. But a higher share of foreign ownership than in Saudi Arabia means the market is more vulnerable to outflows.
“Investors have been rebalancing portfolios away from the UAE market as they reassess the relatively low risk premium, particularly following the strong market rally earlier in the year prior to the conflict,” said Chiro Ghosh, vice president for sell-side research at SICO Bank.
The UAE’s economy is also more exposed to international trade and tourism, which have been disrupted by the conflict. In contrast, Saudi Arabia’s oil-dominated economy may benefit from higher crude prices and its ability to ship supplies from its Red Sea coast.
“Re-opening of the Strait of Hormuz is key for regional supply chain normalization and to concurrently offer support to the equity investor sentiment on UAE,” Bilandani at Jefferies said.
Written by: Andrey Biryukov — With assistance from Laura Gardner Cuesta @Bloomberg
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