Saudi reforms to boost insurance sector, weigh on petchems: Amwal Capital Partners

Saudi Arabia’s recent economic and social reforms will help boost the domestic equity market segments, investment management firm Amwal Capital Partners said in a recent report.

The insurance, banking, healthcare, tourism, construction and education sectors are expected to see a positive impact from the macro reforms, the UAE-based firm said.

“Saudi insurance has strong growth potential that will be delivered through both new regulations expediting enforcement and the government’s aligned objective to shift public spending to the private sector,” the report said.

While the insurance sector is forecast to see a slowdown over the short-term as levies such as the dependent tax and VAT weigh on the expat population, there are positive catalysts for a number of segments such as motor, casualty and property, it added.

Motor insurance will benefit from the enforcement of the third party liability (TPL), in addition to the introduction of female drivers. Amwal Capital Partners expects motor insurance to reach full market coverage within the next three years.

The property and casualty segments, meanwhile, will benefit from the government drive to ensure the safety of public places via new regulations, tying licensing to insurance, it said.

In the banking sector, the government’s plan to ensure higher house-ownership could mean stronger loan book growth for retail-focused banks. The possibility of increased car loans as women begin to drive is also a positive.

“The sector will also benefit from higher interest rates leveraging their cheap cost of capital and many of these banks continue to trade inexpensively relative to their expected return on equity,” the report said.

“Furthermore, the banking sector is heavily over capitalized and banks are now being allowed to release some of this overcapitalization in the form of dividend payouts,” it added.

For the construction sector, the Kingdom’s plans to reinitiate large infrastructure and housing projects will provide a boost, although higher fuel and energy costs could prove to be a drag, Amwal Capital Partners said.

Meanwhile, petrochemicals, telecom and consumer discretionary segments will likely face headwinds as a result of the economic transformation.

Weak consumer confidence and a higher cost of living are expected to impact the consumer discretionary sector, the report said.

“Petchems will perform decently if current spreads sustain as oil prices remain high and a delay of subsidy removals takes place. Yet as time passes, we come closer to the removal of subsidies and this sector will become unattractive,” the firm said.

“We would consider this sector on an opportunistic basis only,” it added.

Amwal Capital Partners also cautioned against the telecom sector, which is suffering from cheap pricing and a decline in expat population.

“Unless there is drastic support by the government under the form of a restructuring and/or renegotiating the royalty/licensing fees, we don’t see a bright future for the sector,” it said.