Strategy Note /
Saudi Arabia

Saudi revisited: Pilgrims back for Hajj, might investors return too?

  • Pilgrims back in Saudi to perform Hajj, a reminder of religious tourism sector's potential. Might investors revisit too?

  • Saudi PE back to 5-year average, sovereign finances stabilised, corporate and consumer confidence high, US detente

  • But reliance on oil revenue, youth unemployment, low productivity remain; so, top-down, still mainly a play on oil price

Saudi revisited: Pilgrims back for Hajj, might investors return too?
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
8 July 2022
Published byTellimer Research

A million Muslims are back in Mecca to complete the Hajj, the first mass pilgrimage since Covid. Might investors revisit the Saudi market too, now that its PE multiple is back to the 5-year average?

Pilgrims return

The tourism sector directly contributes 3.4% of Saudi GDP, on average over 2016-18, and total religious tourists (Hajj and Umrah) could increase by 3x from 2021 just to get back to pre-Covid levels and by 8.5x to get to Vision 2030 targets.

Hajj pilgrim return hints at Saudi religious tourism potential

Saudi equity market's recent de-rating

The Saudi equity market price/earnings valuation multiple is back to its 5-year average, compared to the 25% premium it exhibited as recently as the end of March, soon after the Russian invasion of Ukraine.

This has been prompted mainly by investor contagion from declines in global equities and, perhaps for the local investors which still dominate trading, the crypto implosion too, as well as the pull back from peak oil prices.

Saudi equity market PE valuation is back to 5-year median

Using a combination of economic exposure to net commodity exports and price/book valuation relative to history, Saudi also looks closer to fair value on this relative, top-down, measure amongst its EM peers.

Net Commodity Export exposure and trailing PB in EM: Saudi closer to "fair value" on this relative measure

At the individual sector and stock level, where much of the discussion is outside the top-down scope of this report, the valuation comparison is not so favourable. But, for example, in the case of the Banks in Saudi compared with those in South Africa or Brazil, inflation and currency risks are likely much lower in Saudi.

Saudi equity sector valuations expensive vs global peers

Factors in Saudi's favour

Apart from cheaper valuation, there are a number of fundamental factors in favour of the Saudi investment case:

  • US relations;

  • Sovereign finances;

  • Inflation manageable;

  • Bank liquidity;

  • Corporate and consumer confidence.

US relations have clearly improved, from the early days of the Biden administration, as a result of Saudi's spare production capacity and its repaired cooperation with other accessible owner of spare capacity, the UAE. The time when the risk of sanctions was increasing has clearly passed.

Saudi's spare oil capacity has driven detente in US relations

The period of high oil prices has stabilised Saudi sovereign finances, whether measured by annual fiscal balance or net foreign reserves.

Saudi fiscal surplus for first time since 2014 oil crash

Saudi foreign reserves (last line of defence) have stabilised

Inflation, a scourge of most peers in emerging and developed markets, appears under control in Saudi, largely due to the persistence of government subsidies, which, in turn, are more affordable with flush sovereign finances.

Saudi policy rate (pegged to US) is keeping up with inflation

The local liquidity crunch which drove up interbank lending rates to a new peak has likely abated with the injection from the central bank at the end of June.

Saudi injection to address tighter liquidity for local Banks

Saudi corporate confidence, measured by purchasing managers index, and consumer activity, measured by point of sale transaction value, appears to have recovered to higher than pre-Covid levels.

Saudi corporate and consumer activity above pre-Covid level

Structural challenges remain

Despite all the seismic changes in Saudi – in terms of the concentration of political power in the office of Crown Prince Muhammad bin Salman, which resolved the perpetual succession risk and should make for much faster decision-making, and the resulting reforms to social behavior, visa and business regulation, capital market liberalisation, privatisation, and non-oil development – some of its most difficult structural challenges remain:

  • High youth unemployment and

  • Low productivity.

According to the Saudi General Authority for Statistics, youth unemployment for Saudi citizens was 15% in 1Q 2022. This is about half the 25-30% level estimated by the World Bank and International Labour Organisation in the years 2018 to 2020.

Saudi unemployment concentrated in the youth segment

While many of Saudi's domestic economic reforms have been focused on mobilising large investments, eg the funding and propulsion of the Public Investment Fund or the Shareek (private sector partner) programme, what is much harder to fix (ie it takes longer) is persistent low labour and capital productivity.

Low labour productivity requires a shake up of the effectiveness of education and training and the pay and benefits incentives for Saudi citizens, which encourages more to shift into the private sector. And one of the by-products of correctly addressing this by encouraging female labour participation (eg through liberalisation of vehicle driving and guardianship rules) is that the exacerbation of the male youth unemployment problem.

Low capital productivity may be an inescapable constraint of operating in a climate and without the population scale conducive to many activities outside the hydrocarbon and natural resources sector.

Saudi has a productivity problem

When the Aramco Oil Pipelines sale is stripped out of the 2021 figure, Saudi inward FDI remains below the level seen prior to the launch of the era-defining Vision 2030 document in 2016. The enduring challenge of low productivity may be the best explanation of this.

Saudi underlying inward FDI still below pre-Vision 2030 level

Still essentially an oil play

The herculean task of shifting Saudi from an economy reliant on direct oil revenues, the downstream refining of hydrocarbons into products like plastics and fertilizers, the re-investment of oil revenues via the public sector into corporates (eg via PIF) or consumers (via subsidies) is a generational one.

In the interim, oil revenues (in turn, global price and Saudi volume), remain central to the economy and Saudi's geopolitical position.

The removal of Russia from the global emerging market radar, which leaves Saudi as, by far, the most liquidly traded oil exporter equity and debt market, likely reinforces this link in the eyes of the largest EM funds.

Saudi equities still move mainly in sync with oil price

Related reading


Saudi's 'Vision 2030' five years in, Apr 2021

Saudi's massive investment program does not fix key problem of low productivity, Mar 2021

Saudi and ESG

Sportswashing and LIV Golf a warning for EM funds in the ESG era, June 2022

Oil and Commodities

Biden's Middle East trip likely won't push oil prices down, July 2022