Tadawul could cross 8,000 points on potential EM upgrade, oil price recovery: analysts

Tadawul All Share Index (TASI) could hit a fresh peak surging above the 8,000 point level by the end of this year, amid expectations for a recovery in oil prices over the short-term and upgrading Saudi Arabia to emerging market (EM) status, analysts told Argaam. 

The current data reflects a positive trend for the Saudi benchmark, the analysts said, adding that the index should nudge above the 7,300 mark to hit new levels.

“TASI’s general movement a few weeks ahead of Eid al-Adha holidays maintained support at 7,000 point-level. The previous correction from 7,590 pts to 7,000 pts signals that the market will hit a higher peak,” said Abdullah Al-Jabali, member of the International Federation of Technical Analysts.

This outlook is backed by the technical movement of oil prices, which are the major market driver at present. Brent crude prices are projected to hit new records between $56 and $58 per barrel (bbl) over the next two weeks, while WTI crude oil prices could reach $55 bbl. 

“At such levels, we can expect oil to hit a new annual peak since the beginning of 2016,” Al-Jabali added.

The decision made by OPEC and non-member producers to cut oil output by 2.5 million bpd had a positive impact on the market. The steep decline in US crude stockpiles over the last three months will also help oil record more gains.

Saad Al-Faridi, research manager at Al-Khair Capital, said current data shows that TASI can break the 7,300 level to reach 7,421 pts by mid-September.

The Saudi index, however, is still set to be hit by profit-taking. It is forecast to drop to 7,250 pts ahead of rising to 7,540-level, then 7,777 pts before reaching the 8,200 mark towards the end of 2017.

Investors will likely focus on blue chips in the banking and petrochemical sectors over the near term amid improved oil prices, which are likely to fluctuate between $55 and $62 bbl until the end of the third quarter.

Tamer Al-Said, a member of the Saudi Economic Association (SEA), said that Tadawul is witnessing positive indicators this year.

“We had concerns for a steeper decline in corporate profit; however, consolidated earnings were solid for the market which is still trading at a P/E ratio of 16.7x – a strong rate over the last decade,” Al-Said added.

Tadawul’s potential upgrade by MSCI and index provider FTSE Russel to EM status will also be a major driver for attracting more investments and liquidity to the market.

“Regardless of investors and foreign funds’ sentiment, Tadawul’s weight is expected to stand at 3 percent of these indices. Fund managers, therefore, will have to track weights of the markets composing the benchmark indices,” Al-Said said.

Upon joining MSCI’s Emerging Markets Index, Tadawul is projected to attract $40 billion to $60 billion in cash flows over the next two years, which accounts for 15 percent to 18 percent of market capitalization.

However, investors will still be closely monitoring geopolitical tensions in the region, which remain volatile, and could weigh on sentiment.

For Arabic version, click here.