The vicious cycle: earnings of Saudi firms driven by consumption and government spending

Published June 12th, 2014 - 10:21 GMT
"Earnings of companies listed in Saudi Arabia will be driven primarily by government spending and increased personal consumption."
"Earnings of companies listed in Saudi Arabia will be driven primarily by government spending and increased personal consumption."

"Earnings of companies listed in Saudi Arabia will be driven primarily by government spending and increased personal consumption. The Saudi government embarked upon an aggressive 10-year spending program five years ago and, with oil prices currently at elevated levels, we expect government spending to remain healthy,” Shakeel Sarwar, Head of Asset Management at SICO, said. Further, “increased personal consumption in Saudi Arabia is driven by favorable demographics and initiatives taken by the Kingdom to increase employment of Saudi nationals," Sarwar pointed out.

Bahrain-based regional investment bank, Securities & Investment Company (SICO), announced Wednesday that its flagship Khaleej Equity Fund recently completed the first 10 years of operation since being launched at the end of March 2004. The Fund, which seeks long-term capital appreciation by investing principally in equity securities listed on GCC stock markets, is one of the oldest, best-performing and highest-rated funds in the MENA region.

Since inception, the Fund has achieved a return of 203.9 per cent compared with 77.4 percent by its benchmark, the S&P GCC Composite Index, and has outperformed the index for the past seven consecutive years. Its annualized return over the past 10 years has been 11.7 per cent versus 5.9 per cent by the index, and it has consistently ranked in the top quartile of its peers. At the end of its first 10-year period, the Fund posted its highest-ever NAV of $303.89. Saudi Arabia and the UAE comprised 70 per cent of the Fund's allocation to GCC countries.

Looking at the prospects of the Khaleej Equity Fund for the rest of the year, Sarwar said: "We expect the positive momentum in GCC markets to remain intact. As measured by the S&P GCC Index, the GCC markets have increased 15 per cent during the first five months of 2014, compared with 25 per cent for the whole of 2013.”

"Although we believe that valuations of small and mid-cap companies in the region are stretched, we expect further upside potential among the large blue chip names, particularly in the UAE and Saudi Arabia. The UAE real estate market is experiencing a resurgence due to increased tourist arrivals and funds flows from regional economies such as India, Pakistan and Egypt; while UAE banks and large real estate developers such as Emaar stand to benefit from this trend.

Rated regularly since 2007 by leading international agencies, the Khaleej Equity Fund has achieved the highest ratings in the region, as well as being recognised by numerous industry awards, including prestigious Lipper Awards in 2008 and 2011. The Fund has also been cited by industry analysts for its stylistic consistency adapted as part of a disciplined investment process, supported by a strong and stable management team, robust risk monitoring procedures, positive returns symmetry, and above-average information ratio.

Commenting on this important milestone for the Khaleej Equity Fund, Najla M. Al Shirawi, Chief Executive Officer of SICO, said: "I am proud of our asset management team headed by Shakeel Sarwar for their professional management of the Fund over the past 10 years. The team's stability and longevity are unmatched in the industry, and have been a key factor in the Fund's consistent performance.

"The proven track record of the Khaleej Equity Fund results from SICO's unique conservative asset allocation and prudent bottom-up stock picking, which focuses on the long-term potential of underlying equities rather than on short-term momentum-driven rallies. In addition, our regional insight, quality of research, and knowledge of investee companies are other key factors that have enabled SICO to provide consistent and stable long-term returns to our investors," explained Al Shirawi. 

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