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Blog

Fall Together, Rise Alone!

Date : 02/12/2012
Author:  M.R. Raghu & Humoud Al Sabah

This is a strange pair of two markets, Saudi Arabia and India. One is a rich oil producer sitting on huge amount of wealth and is 7 times richer than India on a per capita basis. Another is a growing emerging market three times the size of Saudi Arabia.
 


 
On the 31st of January 2005 the TASI index was at a modest 8,231 points while the SENSEX was at its modest 6,555 points. Since that date the TASI index peaked at 20,643 points on 28/02/2006 while the SENSEX peaked to 20,286 points on 31/12/2007. The global credit crisis in 2008 brought them down together (as they did to all the markets in the world) with their bottoms reaching during February 2009 shedding 79% and 56% respectively (from peak) of their values. However since that date SENSEX bounced back to post a return of over 100% while Saudi Arabia totters. This has created a chasm between the two markets in terms of long term returns. During the last 5 years, Sensex produced a negative annualized return of 2% against negative annualized return of 5% for Saudi Arabia. Strangely enough oil prices seem to correlate more to Sensex than to Saudi index TASI (may be spurious correlation!).
 
 
Obviously this bounce back for India has produced some valuation excesses compared to Saudi Arabia. India currently trades at a p/e level of 15 (median is 16.5) while Saudi Arabia trades at 12 (median 14). Due to low valuation, Saudi offers better dividend yield (4.1%) compared to India’s 1.4%.
 
For the future, the following scenarios emerge:
 
  1. The differential gap narrows with Saudi rising and India staying put or falling
  2. The differential gap widens with India keeping up the bull momentum and Saudi straying sideways as has been the trend of late
  3. The differential gap stays put with either both markets witnessing upward moment or both markets witnessing side way movement.
 
We would go with 1 above since valuation for Saudi Arabia borders on reasonable, government spending remaining strong, and oil price continuing to maintain strength. Time for pair trading among uncorrelated markets!

 

Comparison

KSA

India

GDP Constant USD Bn

657.049

1,946.77

GDP Per Capita PPP (USD)

25,722.00

                                        3,851

Market Cap (USD Bn) (22/Nov/2012)

365

550

Mcap/GDP

56%

28%

Exchange

Tadawul

Bombay Stock Exchange

Index

TASI Al Share Index

Sensex

Performance (CAGR)

 

 

5 years

-10%

-2%

3 years

2%

2%

YTD 11/12

1%

20%

Standard Deviation (2007-2012)

37%

45%

Correlation

38%

total number of Stocks Listed IN Exchange

177

11,132

No of stock in the Index

ALL

30

Top 5 companies in index and their weight

SABIC: 20%

ITC 10%

 

Al Rajhi Bank: 8%

Reliance 8.75%

 

Saudi Telecom: 6%

HDFC Bank 8.05%

 

Saudi Electricity 4.1%

HDFC 7.61%

 

SAMBA Financial Group 3%

ICIC Bank 7.52

Current Index Level (27/11/12)

6,462

18,537

Historical peak (2005-12)

20,643 (Feb.2006)

20,232 (Dec.2007)

Historical Trough (2005-2012)

4384 (Feb.2009)

8891 (Feb. 2009)

Peak to trough (2005-2012)

-79%

-56%

Trough to current (2005-2012)

47%

108%

 current P/E

12

15

Median P/E

14.1

16.4

Max P/E (2005-2012)

18.8

26.3

Min P/E (2005-2012)

7.8

9.0

Div Yield

4.1

1.4

 

Tags:  Saudi Market

Ratings:
 Current rating: 4 (3 ratings)

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