BUSINESS

Jan 2018: Strong start to the year

February 22, 2018

TASI continued rising in January 2018, breaking the 2-year high that was last witnessed in October 2015. The rally was likely driven by: (a) strengthening oil price — average monthly WTI price rose 9.8% in January 2018, building on the 2.3% rise in December 2017 and 9.8% rise in November 2017.

(b) fiscal stimulus via one-time ‘cost of living’ allowance for 2018 (likely SR40 billion gross benefit for consumer spending), and announcements relating to reinstatement of annual hikes for public sector employees — both of which negates the impact of VAT and hike in gasoline/ electricity prices for majority of Saudi households, and could also help drive credit growth for the banks.

(c) likely inclusion of Saudi Arabia by FTSE and MSCI in their emerging market indices this year. The above factors led to heightened interest in banking sector, which was the leading sector driving 9.2% TASI rise over the last two months, according to a Al-Rajhi Capital Research report.

For instance, Al Rajhi Bank, the sector heavyweight with high float (significant weight likely for the stock post Saudi Arabia’s inclusion in EM indices) accounted for 23% of TASI’s 646 points rise over the last two months.

Materials, the other heavyweight sector (31% of TASI m.cap), continued to witness investor interest over the past two months but for different sub-sectors i.e. 5.4% rise in January 2018 was led by Petrochemical heavyweights such as SABIC, Yansab & Kayan (due to rising oil price) while 3.0% rise in December 2017 was led by Cement sector (due to expansionary budget).

January 2018 was a milestone for TASI in terms of foreign investor interest — the combined QFI + SWAPs net buying stood at SAR2.64bn, the highest level since August 2015 (when this data started being published). We believe (a) investors’ optimism on inclusion of Saudi Arabia in EM indices, and (b) CMA’s move to further ease QFI investment rules in early January, were catalysts for the spurt in foreigners’ net buying.

As mentioned in its previous reports, it believes the foreign investors’ interest will continue to rise going forward, especially with the much-awaited IPO of Saudi Aramco.

Key takeaways from our analysis:

Unlike price, TASI traded value makes a soft start to the year: While TASI logged 5.9% gains during Jan 2018, the average daily traded value (ADTV) stood at SAR3.56bn, a decline of 20.6% y-o-y. However, Jan 2018 ADTV was 14% above the last 6 months average, implying better sequential performance.

The real test for TASI traded value will be the Feb-May 2018 period, as the corresponding period of 2017 witnessed 42% y-o-y decline in traded value. Whether the traded value stabilizes at last year’s levels needs to be watched.

Key takeaways from market positioning: Majority of TASI movers are Banks (Al Rajhi Bank, NCB, Samba, Riyad Bank, Alinma, and ANB), Petrochemicals (SABIC and Kayan), and other heavyweights like Ma’aden. Of course, not all of the move will be attributable to the likelihood of these stocks being a part of EM indices of MSCI & FTSE, but the collection of the top stocks, which moved the market probably suggests that investors are favorably viewing these names.

Food & Beverages sector is witnessing lower investor since the past few months as they are facing volume pressure from lower consumer spending (including decline in population growth rate), and they do not have the levers of market share gains unlike their retail peers. — SG


February 22, 2018
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