IIF's Iradian said several factors have helped Saudi stocks boom. For years, the stocks had underperformed, creating the room for equities upside, and there has historically been a correlation between Brent oil prices and Saudi equities. "You have an economy where 85 percent of export is some form of oil and the rest, even the non-oil, is petroleum products," Iradian said. He said the higher oil revenue helps the private sector and leads to greater economic confidence because it implies a higher level of government spending.
After years of austerity due to the oil price crash and increasing concerns that the Saudis cannot continue to fund their heavily subsidized economy, the rally in crude has flipped the budget equation. "The budget this year is expansionary and that boosts the economy," Iradian said.
The IIF estimates non-hydrocarbon real GDP growth at 2.7 percent in 2018 and 2019, compared to 1 percent last year, mainly driven by fiscal stimulus.
Steven Cook, senior fellow for Middle East and Africa Studies at the Council on Foreign Relations, said higher oil prices lessen all the worries from 2015 and 2016 about the Saudi government's ability to maintain its commitments, but the consolidation of power in the hands of the Crown Prince also is significant for the market and investors as his reform program is widely regarded as critical for Saudi Arabia's future prosperity.
In January, Saudi regulators changed rules for qualified foreign institutions to allow them to own up to 49 percent of listed securities as the kingdom opens up its stock market and plans a 5 percent sale of $2 trillion oil giant Aramco in 2019.
IIF noted in a recent report that plans to privatize several state-owned enterprises beyond the Aramco deal, a doubling in the size of the domestic stock market and the trading of local currency government bonds on the Saudi exchange, which began this month, all deepen the kingdom's capital markets. In February a bankruptcy law was enacted to make the Saudi market more attractive to entrepreneurs and investors.
"The bankruptcy law is a very important one," Seznec said. "It was one of the main things stopping foreign ownership in Saudi Arabia." The international banker said all of these activities of the kingdom are for real and will push earnings positively, but it would be unrealistic to not think the market has reacted significantly to the crude oil rally. "It's unrealistic to think otherwise, but in the medium term to long term, this is sustainable."
Even the Aramco deal is not only about generating hundreds of billions for state coffers, Seznec said, but to create a culture of transparency with a state-owned company. "If you do it with the biggest state company, that will emphasize that transparency is important for everyone," he said.
On Sunday, Aramco announced it was adding a woman to its board of directors for the first time, Lynn Laverty Elsenhans, the former chairwoman, president and CEO of Sunoco.