Investment in infrastructure projects could provide a significant opportunity for investors in Saudi Arabia as government spending is set to touch SR1 trillion ( $266.6 billion) in 2013, according to Emirates NBD Wealth Management, a part of the Middle East's leading bank.
Speaking at an investor road show in Riyadh, Mark McFarland, chief investment strategist, Emirates NBD Wealth Management, said: "Across the GCC, government spending will be a key driver of GDP growth in 2013, as regional economies focus on upgrading their physical infrastructure and social facilities in line with world-class standards. This is particularly true of Saudi Arabia, where public spending is set to increase by 15 percent in 2012 to touch SR 1 trillion. Much of this investment will be directed toward construction of residential, educational and health facilities and improvement of transport infrastructure." Other GCC countries that could benefit from increased government spending and resultant public sector job creation include Qatar and Oman.
McFarland underlined that the increase in government spending will be driven partly by higher oil prices but the improved outlook for value-added petrochemicals, and Saudi Arabia's plans to reduce dependency on hydrocarbon markets, suggest that the investment will be sourced more broadly than in the past. This reduces the onus placed on oil revenues to fund development.
"With growth returning to world markets and oil prices high, Saudi Arabian equities offer great value for investors," said McFarland. "Petrochemicals are good value and banks will benefit from increased activity in the financial and real estate markets.
Commenting on the outlook for oil production, McFarland said: "With slower global industrial growth and falling demand, oil production in 2013 is expected to remain largely unchanged in most of the GCC economies, including Saudi Arabia. The only exception is Qatar whose recent expansion of its LNG capacity means it is approximately 50 percent of its GDP."
The underlying valuation of Saudi markets relative to other frontier markets suggests that investors need to look closely at opportunities in Saudi Arabia, said McFarland. He emphasized that the Saudi markets offer better credit quality while there is no exchange rate risk as compared to the markets in Eastern Europe, for example.
Emirates NBD Wealth Management is also advising investors to look closely at alternative asset classes, in particular investment opportunities in real estate, which McFarland said, is beginning to pick up across the GCC, particularly in Saudi Arabia and the UAE. "Property is cheap in KSA – relative to the UAE and Qatar – and in demand from a population enjoying higher incomes and better access to financing options," he added.
In general, investors need to run a balanced portfolio of multiple asset classes and geographies in 2013, with emerging market equities and commodities being preferred to the US and European fixed income securities, according to Emirates NBD Wealth Management. "Looking at world markets, we see investment opportunities in equities and commodities across the globe, including MENA where we favor high dividend equities over fixed income," said McFarland.
From a commodity perspective, and in keeping with the need to capture emerging growth or recovery, McFarland favors palladium, agricultural, cyclical and industrial vehicles all of which have a direct correlation with Chinese recovery.
Also participating at the round table, Gerhard Schubert, head of precious metals at Emirates NBD Wealth Management, said the precious metals market is expected to show signs of divergence over the course of 2013. "The gold price seems well supported by official institutional buying for portfolio diversification reasons, and the ongoing reservations about the state of the US economy and the debt situation. The sovereign debt issues of the euro zone countries still loom large, and they can be expected to take center stage again in the weeks and months ahead," he said, highlighting that the low interest yielding environment in the major countries lent itself further toward investment into precious metals, especially gold.
"Platinum prices have regained the somewhat traditional premium over the gold price, and are expected to stay in a market prone to potential supply shocks out of South Africa," said Schubert, explaining that platinum recently experienced a significant change in its fortunes, as a result of the reduction in platinum production, shifting the balance of supply and demand toward a supply deficit for the first time in recent years.
Schubert pointed out that palladium has the best fundamental story of all precious metals. With a supply deficit already accepted as given, it is widely assumed that the Russian stockpiles have been sufficiently depleted. "The automotive industry is the biggest customer of the palladium industry, and its outlook is positive, even though European car production is lagging behind. Palladium has already gained 20 percent in the last eight months and the outlook for a continuation of this trend is expected," he added.