Saudi Arabia best emerging market bet [Khaleej Times (United Arab Emirates)]

Saudi Arabia, the world's biggest oil exporter, may allow foreigners to invest directly in stocks in the next year, said John Burbank, founder of $3.7 billion San Francisco-based hedge fund Passport Capital.

"The place that we probably have by far the biggest weight relative to other people would be Saudi Arabia, which is our favourite emerging market," Burbank said in an interview with Bloomberg Television recently.

Passport has about 17 per cent of its capital invested in the Arab world's largest bourse.

"We think the market's going to open up in the next year." Direct foreign investment in Saudi stocks would attract $25 billion to $30 billion in inflows, Burbank said. The kingdom, which said it will open the market gradually, allows non-resident foreigners to invest in shares through equity swaps and exchange-traded funds. Foreigners account for about two per cent of investments on the bourse, Burbank said. Investors are seeking access to Saudi Arabia as the government pursues a spending plan of more than $500 billion in an effort to boost the non-oil economy.

MSCI, whose gauges are tracked by investors managing $7 trillion, last year resumed Saudi coverage and said it would consider including the nation in frontier or emerging market indexes if it allows direct access to foreigners.

'Domestic economy'

"What we're interested in is the domestic economy," said Burbank, whose $1.3 billion Passport Global fund rose about 3.4 per cent in January, according to a performance update to investors obtained by Bloomberg. "The kingdom is taking in so much revenue and redirecting it now into the domestic economy."

Saudi Arabia's economy grew 6.8 per cent last year after raising its 2013 expenditure target by almost a fifth to a record SR820 billion ($219 billion). That beat the 5.6 per cent median estimate of 16 analysts compiled by Bloomberg. The growth rate is "pretty extraordinary in these times," Burbank said.

Saudi Arabia's stock exchange has a market capitalisation of SR1.44 trillion ($382 billion), according to data compiled by Bloomberg. Saudi stocks have a dividend yield of 3.5 per cent, compared with 2.7 per cent for the MSCI Emerging Markets Index.

Petrochemicals stocks in the kingdom are attractive given high margins, Burbank said, without specifying which companies Passport is invested in.

Saudi Basic Industries Corp, the world's biggest petrochemicals company, is poised to report a 15 per cent increase in 2013 profit, according to the average estimate of 14 analysts compiled by Bloomberg.