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Social and economic change is happening in Saudi Arabia, and it’s happening fast. But, these developments aren’t the only thing breaking the norms.
The Saudi Stock Exchange (Tadawul), which traditionally traced oil price movements, has been disconnecting from this impact since 2016 as investors and analysts are turning their focus to new indicators.
Saudi Aramco’s upcoming initial public offering (IPO), Tadawul’s potential inclusion on emerging market indices by FTSE Russell and MSCI, and the Kingdom’s rapid reforms are among the many factors set to push TASI higher in 2018 and perhaps the next year.
“We expect the Saudi government to broadly deliver on its spending plan, which will keep the domestic economy on a reasonable growth path,” Hans-Peter Huber, chief investment officer at Riyad Capital, told Argaam.
“Against this backdrop, we expect single digit EPS (earning per share) growth for TASI in 2018 (+7 percent). Applying a long-term average PE-multiple of 16.8x, our EPS target of 482 EPS in 2018 translates into a target level of 8,100 for TASI,” he added.
Riyad Capital has put the Saudi market on overweight in its global asset allocation framework.
Meanwhile, as the Kingdom pushes ahead to diversify its economy and ease its dependence on oil, the relationship between TASI and crude oil has become increasingly non-linear and, therefore, must be seen in the correct context, analysts said.
“This is the reason why we look at GCC indices over a five-year period,” Tariq Bin Hendi, acting chief investment officer at Emirates NBD, told Argaam.
Oil is currently down about 30 to 40 percent from five years ago, indicating that the Saudi market has — in fact— outperformed oil over a five-year period, he said. But in 2017 while crude prices rose sharply, TASI’s response was muted.
“The reason was that government expenditure was lower, following the austerity measures started in 2016,” said Bin Hendi.
Riyadh-based Al Rajhi Capital recently noted that while WTI crude prices gained 22 percent on an average over November 2017 to January 2018, TASI gained 6 percent in the same period.
The benchmark gained about 3.7 percent in the two years, while Brent crude rose nearly 70 percent starting January 2016 until end of 2017, First Abu Dhabi Bank said in its 2018 investment outlook report.
“The relevant factor in this context is the difference of oil prices to the fiscal break-even price,” said Huber.
If oil prices are largely above the fiscal break-even price, the TASI-oil price correlation is low as slight declines in oil prices usually do not impact Saudi fiscal policy.
When oil prices drop below the fiscal break-even price, the government is pushed to undertake fiscal consolidation, which may lead to a contracting impact on the local economy.
Under this scenario, the TASI-oil price correlation usually picks up.
“Despite oil prices below the fiscal break-even price, this correlation has largely broken down since summer 2016 as the market expected the government to pursue a sustained fiscal consolidation policy based on the targets defined in the fiscal balance program 2020, irrespective of the level of oil prices,” said Huber.
“This, however, is in our view not entirely correct as oil prices still influence fiscal spending and the path of fiscal restructuring in the short-term,” he added.
With oil now holding firm at around $65 per barrel, the Saudi market is expected to witness a period of stabilization, and possibly a gradual increase in both government and private sector spending. This is expected to reflect positively on equities.
“We are hopeful that in 2018 there will be a catch-up (to oil price movement) on the Saudi index,” said Bin Hendi.
Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com and
Reem Abdellatif at reem.a@argaam.com
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