TASI could jump nearly 800 points by 2018-end, says Riyad Capital

The Tadawul All Share Index (TASI) is expected to touch 7,936 points by the end of 2018, driven by supportive indicators such as inclusion in MSCI Emerging Markets index and FTSE Emerging Markets index, along with the additional boost from listing of Saudi Aramco shares, Riyad Capital said in a report on Wednesday.

The benchmark index started the year at nearly 7,200 points on January 1. It was last trading at 7,184 points on Wednesday.

Riyad Capital said it views 2018 as a year when economic growth will resume pushed by revenue diversification and prudent expenditures.

“This is the time to go long on the Saudi reform story,” the brokerage firm said. “While time will tell, as always, about the success of the reforms, we believe all the ingredients are coming together to finally diversify the Kingdom’s economy into one less-dependent on oil.”

The expected government spending will determine the economic growth, it added.

In its budget for 2018, Saudi Arabia set revenue at SAR 783 billion and public spending at SAR 978 billion, with a projected deficit of SAR 195 billion. The new budget will also continue to spend on various development sectors to push economic reforms, King Salman said while announcing the budget last month.

According to Riyad Capital, the key risks to Saudi stock markets include: fresh downturn in crude prices to below $50 per barrel; oil rising above $100/bbl and dampening government interest in economic reforms; slow implementation of transformation plans; short-term impact of value-added tax (VAT) and expat fee on company’s earnings; and delay in MSCI inclusion.

The brokerage said it maintains neutral to positive outlook on petrochemicals, banks and cement; while holding neutral to negative on building materials and telecoms.

“We prefer Kayan and Petrochem for now. Potential upgrade: SABIC,” the report said about petrochemical sector.

Factors that to watch out for are: fluctuations in crude prices, rising supply out of China, utility price hikes in Q1 2018, unscheduled shutdowns and feedstock hike post-2019.

For the banking sector upcoming risks include big-ticket defaults and further interest rate hikes by US Federal Reserve.

The cement sector has seen a relief rally following Budget 2018 announcements and NEOM projects, but mounting inventories remain a cause for concern, the brokerage said.

“Stocks which could see re-rating potential are Southern and Yanbu,” it added.