Economy, Business And Markets

Iran Can Ignore Saudi Market Lesson

Iran Can Ignore Saudi Market LessonIran Can Ignore Saudi Market Lesson

For all the meltdown in relations between Iran and Saudi Arabia, the two Middle East countries have got something in common—at least in terms of markets.

This time last year, Saudi authorities promised to open the country's stock market to an anticipated wave of direct foreign investment. In 2016, it's Iran's turn—after sanctions are lifted, a tide of foreign money could flood in, Bloomberg reported.

But that's where the similarity ends. The Saudi market's opening has been a short-term flop, thanks mostly to the slump in the price of oil. The Tadawul All Share Index slumped 17% last year–a miserable run that coincides with the move to let foreigners put money directly into shares, which took effect in June.

Previously, overseas investors had to make do with exchange-traded funds and so-called participatory notes. Far from rushing into Saudi stocks, foreigners have pulled funds out of the market each month since they were allowed to invest directly, according to Deutsche Bank.

Foreigners now own a smaller proportion of the market than they did a few months ago–4.57% of Saudi shares at the yearend compared with 5.03% at the end of July, according to data from the Saudi Stock Exchange.

It's hard to see the downward trend reversing until the price of oil picks up, lifting the country's energy-dependent economy.

The government is responding to the decline in oil prices by belt-tightening and shifting more of the economy into the private sector. That could help some industries, such as healthcare, as more people are forced to take out health insurance. But the greater concern is that austerity fuels domestic political turmoil in the Arab country.

Low oil prices hurt Iran too, of course. But Iranian oil exports have already been crippled by sanctions, falling steadily over the past several years. That has curbed economic growth: The IMF estimates GDP growth slowed to 0.8% last year from 4.3% in 2014.

Removal of sanctions will boost Iran's exports, cut import costs and give the population access to assets overseas. Real GDP growth could hit 5.5% in 2016/17 and 2017/18 before settling into as much as 4% annual growth after that, according to an October report by the IMF.

For Iran, the lifting of sanctions is a bigger, broader deal than simply giving overseas investors direct access to stocks, as Saudi Arabia did.

There is room for improvement in Iranian stock valuations, too. Charles Robertson, Renaissance Capital's global chief economist, notes that investors rate Iran poorly for ease of doing business and on perceptions of corruption.

Still, based on those two measures, Iranian stocks should command a valuation of about 10 times earnings, whereas they are priced at just about 5.5 times now, he notes.

Even after their recent decline, Saudi shares trade at about 15 times earnings on average, according to Bloomberg data.

After sanctions are lifted, more foreign investment should flow into Iran and stock valuations should rise sharply. And while there are reasons to be skeptical about Iran's market, there is also the prospect of a significant boost to the market from the repatriation of Iranian money frozen overseas.

One of Iran's senior central bank officials told Bloomberg News last year that as much as $29 billion sitting offshore could make its way home. That cash could help shore up the country's banks or it might be spent on much-needed capital investment. Either option would boost local equities.

Iran's stock market can have a better international debut than its Saudi counterpart.

> Saudi Stocks Hurting Most From Tehran-Riyadh Tension

Saudi industrial company the Savola Group is paying the biggest price among Saudi stocks for the deepening diplomatic spat between the governments in Riyadh and Tehran.

Shares of the Jeddah-based food producer, which counts Iran among its markets, sank 9.8%, the most since March, to 43.70 riyals on Tuesday, the lowest level since April 2013, wiping 3.5 billion riyals ($933 million) off its market capitalization in three days.

The stock was the biggest contributor to losses on the Tadawul All Share Index, which dropped 0.7%.

Traders exchanged about 2.7 million shares, almost nine times the three-month daily average.

Revenue from Savola’s operations in Iran accounted for about 11% of the company’s income in the third quarter, according to data compiled by Bloomberg.

Tension between the two countries flared after mainly-Sunni Saudi Arabia executed 47 people it accused of terrorism-related offenses, including a top Shia cleric and critic of the desert kingdom.

Saudis cut diplomatic ties with Iran after protesters broke into the Saudi Embassy in Tehran. Several other Arab nations have followed suit in the past three days.

“Investors are concerned the revenue might be affected by the deterioration of relations between Iran and Saudi Arabia,” said Mohammed Alsuwayed, the head of capital and money markets at Adeem Capital in Riyadh.