These Saudi stock market sectors will steal the spotlight in 2017

Banking, petrochemicals, telecoms and insurance companies are expected to be in the spotlight over the next few quarters, despite relatively weak overall fourth quarter performance.

Saudi Arabia’s benchmark Tadawul All Share Index (TASI) has rallied 19 percent over the past three months, and analysts believe that the current high valuations of Saudi equities leave little room for further gains.

“The Tadawul index is showing decent strength at current levels of around 7,000; no fund manager would be underweight on Saudi now. However, I don’t see any immediate positive triggers,” Nishit Lakhotia, head of research at the Bahrain-based Securities and Investment Company told Argaam.   

TASI’s rebound dates back to late October of last year, when the kingdom raised $17.5 billion in its biggest-ever bond sale. This triggered a flow of funds into the banking system, easing a liquidity squeeze that had sent a key bank rate rocketing. Higher crude oil prices, government payments of dues owed to contractors, and strong buying by domestic financial institutions also lifted investor sentiment.

At a sector level, banks are expected to benefit from higher interest rates and improved net interest margins. In a recent note, Dubai-based Arqaam Capital said it preferred banks with the lowest funding costs and strong operating earnings capacity like Al Rajhi Bank and Samba Financial Group.

Lakhotia is bullish on banks, petrochemicals, and telecoms. However, he warned that as petrochemicals stock valuations are currently high, companies have to be carefully picked for their potential for profit growth, dividend yields, robust business models, and strong cash flow.    

Credit Suisse favors exposure to The Company for Cooperative Insurance (known as Tawuniya), as they “believe that the overall outlook for the insurance sector remains very favorable.”

Arqaam Capital is also bullish on the Saudi insurance sector— particularly Tawuniya and Al Rajhi Takaful— which benefit from substantial market share gains in motor insurance.

Credit Suisse recommends taking profit on Saudi Telecom Co. and Saudi Basic Industries Corp. (SABIC), both of which have seen a strong rally, and with technical momentum looking overbought, are vulnerable to profit-taking. 

“We would look to re-enter both names at more attractive levels,” Fahd Iqbal, head of Middle East Research at Credit Suisse, said in a recent note.

Sectors driven by consumption are seen to be at risk as the recent cut in allowances for public sector employees is expected to substantially trim disposable incomes and discretionary spending. Real estate and builders too are vulnerable right now, due to the slowdown in project spending.   

Meanwhile, Credit Suisse has upgraded its overall stance on Saudi equities to neutral as it believes the recent Tadawul rally was strong enough to break the index out of its technical downtrend.

“However, we would be careful about adding exposure just yet as we see near-term consolidation risk. P/E valuations have reached 14.1, the highest across the Middle East space and moderately above the long-term average,” Iqbal said.

“At the same time, medium-term momentum has become extended and is in the process of topping out,” he added.

Yong Wei Lee, head of MENA Equities at Dubai-based Emirates NBD Asset Management told Argaam that the recent Q4 results show that many Saudi companies have taken provisions to adapt to the new operating environment, in which greater fiscal discipline is being exercised by the government.

“This suggests that earnings are likely to bottom out in the next quarter, with a recovery in sight possibly in Q3 or Q4. Hence, we expect Saudi stocks to perform well as we draw towards the middle of 2017,” Lee added. 

Write to Brinda Darasha at brinda.d@argaamplus.com