TASI may hit 11,000 points by 2021-end on rising oil prices, economic recovery: analysts

The Saudi Exchange (Tadawul), the largest in the Middle East and North Africa (MENA) region, is likely to breach the 11,000-point mark by year-end after crossing 10,500 points late last month, driven by positive sentiments on the back of higher oil prices and resumption of economic activity post-COVID-19 restrictions, analysts told Argaam.

“Sentiments remain extremely positive in the region and Saudi Arabia, especially given the elevated oil prices and the economic activity resumption post the COVID-19 restrictions,” said Junaid Ansari, Head of Investment Strategy & Research, Kamco Invest.

“Tadawul All Share Index (TASI) is up 23.4% since the start of the year, and reaching 11,000 would mean a further gain of three percentage points, which does not look unrealistic, given that we have not even completed the first half of the year.”

However, Ansari warned that unless fundamentals improve significantly during the rest of the year, reaching 11,000 could be an “uphill task”, as Tadawul trades at one of the highest valuation multiples in the region with a price-to-earnings (P/E) of 35.2x and the highest price-to-book (P/B) of 2.4x.

Dubai-based Century Financial’s Global Market Strategist Yogesh Khairajani foresees TASI to cross the 11,000-point mark this year.

“TASI earning per share (EPS) for 2021 is projected to jump by 105% to SAR 539 and estimated to be at SAR 592 in 2022. With the last five-year average P/E at 20, it is only a matter of time before TASI hits the 11,000 mark. In fact, it could hit this year itself since fundamentals support a move higher.”

Although it can never be ascertained when exactly the index will surpass the 11,000 barrier, Ahmed Saleem, Associate, SHUAA Capital Saudi Arabia, noted that stronger results across various sectors coupled with growing optimism among the participants will lead the road to 11,000 and beyond.

Key factors supporting index

According to Ansari, better-than-expected Q1 2021 corporate earnings were one of the key factors that supported the benchmark’s rally this year, in addition to oil prices that remained elevated and stable at around the $65 per barrel mark.

On the other hand, stocks that remained resilient during the pandemic, including sectors such as consumer durables and apparel, software and services, and healthcare and equipment, are some of the biggest gainers since the start of the year, given the uncertainty around the pandemic, sustained benefits to companies in these sectors, and changing lifestyle that would shape the demand trend in the near term.

Saleem added that the growth in TASI and the sentiment among market participants is surely an indication of the times ahead.

“The commitment of OPEC+ has had a significantly positive impact on crude prices, with Brent futures surpassing the $70 mark in June 2021. In addition, the increased proportion of non-oil revenue (approaching 50%) reiterates the government’s commitment to Vision 2030 and contributes positively to the confidence of all participants.”

Saudi government’s effective response to COVID-19, followed up by a successful vaccination drive, has also been one of the key contributing factors to the upward trend observed in TASI, Saleem asserted.

Khairajani said that abundant global liquidity with record low interest rates, a favorable Saudi regulatory environment and a significant increase in retail investors have propelled the index higher.

“Corporate profits have risen sharply as they cut down on costs due to the pandemic, which has provided a tailwind for equities. Higher crude oil prices contributed to the favorable macro environment. Also, the improvement in global risk sentiment means foreign investors are willing to park their funds in emerging markets for higher returns.”

Sector performance

Ansari said that sectors that had severely underperformed during the restriction and pandemic last year are expected to see a recovery rally this year, which include large-cap sectors such as banks, real estate, utilities and telecom.

In addition, resilient sectors from last year are anticipated to continue to stay elevated on the back of strong fundamentals despite uncertainties related to the pandemic, Ansari said.

Saleem expected the cement sector to benefit significantly from the government’s active role in developing megaprojects across the Kingdom, as part of the Vision 2030 program.

“With COVID-19 related restrictions easing across the region, the tourism and hospitality sectors are likely to witness a much-needed phase of recovery.”

Khairajani stated that energy sector companies benefitted from the rising price environment while other standout performers are financials and healthcare.

Reforms driving inflows

In 2019, Saudi Arabia’s capital market reforms helped Tadawul be part of global benchmarks such as FTSE and MSCI. Foreign ownership of shares gradually increased and now stands at 2.73% of total market capitalization as of May 31, 2021.

“An inclusion in the index is a strong positive message that Saudi Arabia is ready for foreign investment. Moreover, it indicates that corporate disclosure and governance have improved to acceptable levels,” Khairajani said.

The biggest benefit from the upgrades in 2019 was the sustained flow of foreign money into the Saudi equity market, which has helped the index stay in the positive territory consistently since 2016, Ansari concluded.

Write to Parag Deulgaonkar at parag.d@argaam.com