TASI to end year at 7,750 as rally expected to ease: CE

Saudi Arabia’s stock market (Tadawul), which had been rising in anticipation of a positive update from index complier FTSE Russell, will likely see a correction and the rally is expected to fade, London-based Capital Economics (CE) said in a recent report.

“We expect the Tadawul to end this year at around 7,750, a 2.5 percent drop from its level at present, and 7,500 by end-2019,” the research firm said.

Tadawul All Share Index (TASI) has risen by almost 6 percent over the past month and closed at its highest level since August 2015 on Tuesday. It has outperformed equity markets in the rest of the Gulf region and the wider emerging world.

In the past, however, decisions similar to recent FTSE upgrade have had “little lasting impact” on Saudi and regional equity markets, CE said.

Meanwhile, if oil prices were to decline over the next couple of years, the rally in Tadawul could come to an end, it added.

The agency expects Brent crude oil prices to fall to $55 per barrel by the end of 2019, leading to a downward pressure on the stock prices of petrochemical companies, which make up around a fifth of Tadawul.

“There are hopes that an upgrade by FTSE Russell would be followed by a similar announcement from rival index compiler MSCI later this year,” CE said, adding that both the decisions would provide a boost to foreign inflows into Tadawul.

CE expects that an upgrade by FTSE Russell could lead to inflows of around $5 billion (or 0.8 percent of GDP), and an upgrade from MSCI could result in as much as $38 billion (6 percent of GDP) of inflows.

The agency, however, added that there is the need to exercise caution as any surge in inflows is unlikely to be sustained and after an initial influx of investment, subsequent inflows will be much smaller.

“It’s worth noting, too, that stock markets in the UAE and Qatar fell after they were upgraded to the MSCI EM Index in 2014,” it added.