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Investors confident Khashoggi furore will play out over time

Saudi Arabia is resilient, they say. Markets likely to be more volatile, but fallout remains manageable


THE furore over the murder of Saudi columnist Jamal Khashoggi may soon be seen as little more than a blip for the kingdom's battered markets, according to investors.

After all, they've overcome so many crises before.

"It will probably create some negative headlines but at the end of the day, people will forget after a while and it will have minimum impact on Saudi Arabia's economic activities and also the credit quality," said Carl Wong, a senior money manager at Hong Kong-based Nexus Investment Advisors Ltd, which oversees US$490 million.

Saudi Arabia's bonds and stocks were caught in the crossfire of a diplomatic flareup as government leaders around the world rejected the kingdom's initial attempts to distance itself from Khashoggi's disappearance, prompting the Arab state to finally admit he died at the consulate. The main index's 30-day historical volatility climbed to the highest since 2016, the yield on its US$5 billion notes due 2028 rose to a record and the cost of insuring the kingdom's debt against default was headed for its biggest monthly increase in more than a year.

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But the outflow is temporary, investors say. Gulf Investment Fund said the recent sell-off has exposed some value in equities, although it's not calling this a buying opportunity just yet. And Nexus Investment Advisors Ltd sees the crisis as a good time to buy the nation's battered bonds.

Mr Wong at Nexus Investment Advisors Ltd, said: "I don't see the knee-jerk widening in credit spreads sustaining further, and it's a buying opportunity for me. If oil prices keep around current US$75 to US$80 levels, this will be very positive for the country's finances. Saudi being a single A rated country, their bonds are trading similar to Indonesia, which is only triple B. Saudi bonds' valuations are already reflecting a lot of the downside. Don't forget that Saudi will be included in JPMorgan's bond indices and passive buying will provide additional support for the bonds".

Mohammed Elmi, an emerging-market money manager at Federated Investors UK in London, which oversees US$380 billion said: "It's the fear over potential actions from the international community that's driving the market now. The base case is there won't be outright sanctions per se, but there will be further diplomatic pressure. It won't be easy for the US administration to apply sanctions as in the case of Turkey, Iran or some other countries.

"Nothing changes concerning the overriding credit quality of the overall Saudi credit complex. Saudi is of critical importance to the global economy in terms of oil sales and arms purchases, and nobody really wants to confront it too vigorously".

Sergey Dergachev, who helps oversee about US$14 billion in assets at Union Investment Privatfonds in Frankfurt, including Saudi sovereign bonds said: "We have seen a re-pricing of the political risk premium. I do not expect a severe deterioration in the US-Saudi relationship, nor do I expect US sanctions for Saudi. The geopolitical significance of this relationship is too important.

"What we might see in the future is more attention being put by investors on political headlines, reform execution of Vision 2030 and geopolitical events, and spreads will likely be more sensitive to those developments."

Abdul Kadir Hussain, the head of fixed income at Arqaam Capital, a Dubai-based investment bank, said: "From a short-term horizon, Saudi spreads will continue to be volatile. But from a longer-term fundamental viewpoint, Saudi is cheap versus other similarly rated sovereigns so, as long as you can withstand short-term volatility, I would be looking to add exposure".

Nick Wilson, the chairman of London-listed Gulf Investment Fund, which has US$120 million in net assets invested in GCC stocks said: "The sell-off has exposed some value, but with the recent turbulence, there's little visibility on how things will progress, so we're constantly monitoring the markets for clues and expect the market to remain volatile in the short term. The fund remains "significantly underweight" on Saudi Arabia, with the majority of holdings on financial services and petrochemicals sectors.

"High oil prices are improving the economic outlook for Saudi Arabia at a significant rate, but the money spent on the real economy is subdued and will take some time to flow through," he added.

Timothy Ash, an emerging-market strategist in London at BlueBay Asset Management LLP, which oversees US$60 billion believes the big winner has been Turkey "with Erdogan playing a blinder, and using this to further improve/leverage the relationship with the West. On Saudi, I think it is important to distinguish between the type of Western investor - foreign direct, versus institutional investor. But generally I think investors will be sitting on the sidelines to see how this plays out." Saudi Arabia "has a stellar balance sheet," with low debt, high cash reserves, "plus plenty of assets to sell".

Trieu Pham, an emerging-market strategist at ING Groep NV in London, said "the disappearance of Khashoggi has put international investors on alert with some increase in risk premiums. Dependent on the events over the next few days, we could see more volatility, but there are enough reasons to believe that the fallout remains manageable. Saudi Arabia remains a key partner for the West and is an significant investor across the globe. Moreover, oil prices remain a suportive driver, while the sovereign bonds will benefit from EMBIG inclusion going forward. There is certainly a risk that the case further threatens the ambitious reform agenda, but that will play out only over time." BLOOMBERG

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