The Saudi equity market is closer to presenting an interesting opportunity for international investors than this time last year. Last November, we previewed the opening up of the Saudi equity market to qualified direct foreign investors, which has now occurred. We made the case last fall that the Saudi market was likely to represent a 3.5%–4% weight within the MSCI Emerging Markets Index starting in 2017, and that it was by far the largest, most diversified, and most liquid market in the Middle East. Furthermore, it benefitted from very sound household finances, a demographic profile that most developed countries envy, and almost no government debt. So what was there not to like? In a word, valuation.

At the time, with a return on equity (ROE)–adjusted price-earnings (P/E) ratio of 15.8, the Saudi market was pricey compared to traditional emerging and frontier markets. We therefore advised patience as the market did not present compelling value, even taking into account its good fundamentals. Since then, however, the local Tadawul All-Share Index (TASI) has fallen from 9,768 to under 7,500 presently. Using the MSCI Index (for ease of comparison), this has brought the ROE-adjusted P/E to 11.2 today, in the 4th percentile of history (admittedly a very short history—since January 2006), and compared with a mean of 19.6 and median of 14.3.

The rest of the world has also come down in price since then, however, so the Saudi market’s relative value has improved more modestly. While developed markets equities are still trading on a not particularly enticing ROE-adjusted P/E ratio of 16.2 (53rd percentile), emerging and frontier markets have devalued more aggressively to ROE-adjusted P/E ratios of 9.7 (3rd percentile) and 10.5 (16th percentile), respectively, from 11.3 and 12.7 in November. If emerging markets are attractively cheap today compared to developed markets, so is the Saudi market.

The Saudi market’s premium rating to its emerging/frontier peers has almost melted away under pressure from the collapsing oil price, but it does still trade at a slight premium. Should investors consider paying even a reduced premium for a market that is driven by a single commodity currently in excess supply? Arguably, the answer is yes, given the market’s finances, liquidity, and growth fundamentals.

Still, one cannot ignore the indirect yet powerful relationship between the oil price/growth in the Saudi economy and corporate profits. This takes place to a large extent through the transmission mechanism of government expenditure on large infrastructure projects, as well as pay raises for public sector employees. The response is not immediate, but occurs over medium to long cycles. So the outlook for public expenditure is key for corporate profits and for markets (there are no conventional taxes).

This year, the combination of a large public sector pay raise following the accession to the throne of King Salman, already budgeted expenditures, and lower oil revenues has conspired to blow out the budget deficit to an expected 19.5% of GDP. However, this is projected to decline in 2016 as spending is tightened and projects roll off or are postponed. And starting from a position of almost no debt, ample cash reserves, and local banks whose appetite for government bonds is high, the government has much more flexibility than most of its peers, developed or emerging. That means the Kingdom can probably wait it out longer than less well-endowed competitors, unless a deteriorating geopolitical environment rekindles spending pressures.

The joker in the pack is of course the price of oil. On the demand side, some signs suggest that current prices are stimulating growth. According to OPEC, lower prices are boosting consumption by 1.5 million barrels/day for 2015. Similarly, lower prices mean that non-OPEC supply is now projected to increase by only 160,000 barrels/day this year. Next year, expectations are that US supply will shrink, and the current oil price futures curve factors in an approximate $5 premium in 12 months’ time.

Of course, the oil price also acts as a barometer for global growth. Its weakness this year no doubt partly reflects the cooling of the world economy and, in particular, emerging markets. A more serious loss of momentum could send oil temporarily below the August lows of $38, but this would probably accelerate the market’s rebalancing between demand and supply.

Also uncertain is the outlook for Saudi corporate profits. Consensus EPS growth expectations have been trimmed sharply for this year to around 1%. That’s still better than many emerging markets peers, and analysts are penciling in a rebound to around 17% next year. If that is the case, then the Saudi equity market is a potentially attractive diversifier.

In conclusion, the Saudi equity market is much closer to presenting an interesting opportunity for international investors than this time last year. The market has de-rated with an oil price that has probably completed most of its necessary price adjustment to rebalance demand and supply. Given its size in the region, growth characteristics, and probable inclusion in emerging markets indexes in the not too distant future, investors that are able to should consider initiating an allocation to the Saudi market through an institutional-quality active manager.

Stephen Saint-Leger is a Managing Director on the Cambridge Associates Global Investment Research team.