Here's why Tadawul may touch 9,000 in 2019

Saudi Stock Exchange (Tadawul), the Arab world’s biggest stock market, will climb higher on the optimism of an oil price recovery and inclusion into Morgan Stanley Capital Index (MSCI) and FTSE Russell emerging market indices this year, experts told Argaam.

Tadawul All Share Index (TASI) is most likely to breach the 8,500 point level in the first half of 2019 and scale as high as 9,000 points this year, given the expected inflow of more passive funds, experts opined.

The Saudi benchmark index rose more than eight percent in 2018, as total market capitalization jumped 10 percent year-on-year to SAR 1.86 trillion. The total value of shares traded crossed SAR 870 billion.

Argaam has compiled the outlook of five regional experts on what factors could drive or impact the Saudi stock market.

Mazen Alsudairi, Head of Research, Al Rajhi Capital

We are optimistic about the market in general. We could see upward moves before and during the inclusion into MSCI/FTSE/ S&P emerging market indices which are in tranches starting from March 2019. Currently given decline in oil prices the sentiments are tepid now.

We are positive about oil which is trading below what we think is a long term sustainable price. A recovery will add to the optimism and help the market in 2019.

On the fundamental earnings front, we may see only moderate improvement as the overall economic situation is gradually improving. On the other hand, certain heavyweight index stocks those are already trading at a significant premium to historical multiples may offset some of the sentiments. However, on the whole, we expect a good year for TASI as more passive funds flow in the market, which till now had likely seen more activity from active funds.

Faisal Hasan, Head-Investment Research, KAMCO Investment Company

For 2019, we are constructive on the outlook for Saudi Arabia’ stock market, as inflows from Tadawul’s inclusion into FTSE and MSCI indices should support the market. We like Saudi banks, as they would be beneficiaries of these flows, given their weight on the Tadawul, and potential rate increases by the US Fed should also drive net interest margin (NIM) and earnings growth. The resolution of historical Zakat for Saudi banks and the impact of IFRS 9 look manageable.  

Muhammad Faisal Potrik, Senior Vice President, Head of Research

Riyad Capital

We believe the Saudi market can breach the 8,500 points level in 2019, most likely in the first half. Given expectations of foreign fund flows on FTSE and MSCI inclusion, the first quarter is likely to see enhanced activity, particularly in bigger market cap stocks in major sectors such as banking, petrochemicals and telecom. Other key events are the upcoming mergers in the banking and petrochemicals space, which is likely to keep share prices of these stocks in focus; investors would be looking at swap ratios and synergies.

Commencement of futures trading at NASDAQ Dubai for 12 major Saudi stocks would certainly help increase interest amongst foreign investors for Saudi companies. This is likely to be followed by the introduction of futures trading at the Tadawul also soon.

Ehsan Khoman, Head of MENA Research and Strategy, MUFG

Heading into 2019, it is evident that the inclusion of the Saudi equity market into the emerging markets benchmarks by MSCI and FTSE Russell will translate into higher passive foreign inflows given explicit weighting assigned to Saudi Arabia.

Given that an estimated $1.6-1.8 trillion of assets under management track the MSCI EM index, of which Saudi Arabia is given a 2.6 percent weighting, we view that this could translate into foreign inflows in the stock market of between $42 billion and $ 47 billion this year.

However, the magnitude of the passive inflows as well as the determination of the scale and size of active inflows will continue to be a function of the front end of the oil price curve; impacting investor sentiment in the viability of the ongoing economic transformation plan as well as broader emerging market risk appetite.

Nishit Lakhotia, Head of Research, SICO Bank

The market is unlikely to rally significantly from here but rather be range bound. There will be volatility during the seven inclusion events through tranches (five FTSE and two MSCI), however, other than that with oil year-on-year lower, we expect earnings pressure on key sector such as petrochemicals while most managers are already overweight in banks.

Accordingly, unless there is a major trigger in oil, favorable geopolitical event (such as Yemen conflict end) or regulatory changes (rollback of expat levies, taxes), we do not foresee significant rally in Saudi market in 2019. However, the index can very well breach 8,500 or even 9,000 on the upside, driven by flows, but will likely see profit booking at such levels.

Stock selection will be very important this year as well as timing, given the range bound expectation of the broader index.

Write to Parag Deulgaonkar at parag.d@argaamplus.com