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
|
