EFG Hermes says Tadawul's trend 'positive', sees rate cut in H2

Hatem Alaa, Deputy Head of Research at EFG Hermes

The general trend of the Saudi Exchange (Tadawul) is positive, thanks to strong liquidity, high number of local investors, and large offerings, Hatem Alaa, Deputy Head of Research at EFG Hermes, told Argaam.

The Tadawul All Share Index (TASI) witnessed outstanding performance in the recent period. However, the biggest challenge, especially for foreign investors, is the presence of solid companies with high stock valuations, as everyone is waiting for a correction in the market, which is likely to be delayed.

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Alaa also pointed out that the top-performing sectors recently included small and medium-cap companies. He pointed to opportunities in the petrochemical sector for long-term and value investors, given the rebound of global economic indicators and the decline in interest rates.

Moreover, there is increasing interest from foreign investors in the Saudi market, thanks to its weight in the MSCI Index after Russia’s exit and the lower-than-expected performance of the Chinese economy. Focus was on the consumer, health, insurance and education sectors, despite their high valuations, but they are linked to the Saudi Vision 2030 and population growth, he added.

Elsewhere, Alaa forecasts the Federal Reserve to start slashing interest rates in the second half of this year, albeit not at the expected rate. This rate drop, according to the research head, would have a positive impact on global financial markets, including the GCC region.

"When the Fed gives the signal that the reduction is imminent, market performance will begin to rebound, and the petrochemical and banking sectors will begin to proceed again," Alaa said.

The Saudi consumer spending has improved notably since 2023. This was due to the easing of inflation, which led to stability in prices of most food and consumer goods, the research head further stated.

He added that the Saudi population is on the rise as more citizens relocate to the Kingdom and amid the growth of religious tourism and labor targets. However, recreational tourism requires further enhancement as it is still in the early stages, Alaa underlined, noting that the various projects, when completed, will boost the tourism sector.

EFG Hermes has an upbeat outlook for the consumer sector, being one of the strongest sectors in 2023 and 2024. This positive view is reflected in the performance of the sector stocks, he elaborated.

The deputy head also pointed out that several companies eye acquisitions in the Kingdom, including Budget Saudi's announcement of its plan to fully acquire AutoWorld, the deal for which EFG Hermes was appointed as financial advisor.

Meanwhile, the decline in the merger and acquisition activity was mainly due to the rise in company valuations. This, however, poses a challenge for companies seeking acquisitions, despite the availability of sufficient liquidity, Alaa stated.

Public offerings on Tadawul, according to the research head, are likely to pick up after the month of Ramadan, especially between April-June.