A slight decline in Saudi interbank money rates and improving liquidity are encouraging investors to retu to Saudi stocks which gained nearly 7 percent last month, according to economists.
Tadawul All-Share Index climbed 1.5 percent Monday, taking its gains since hitting a 2016 low on Oct. 3 to 14.4 percent.
Oil was a key factor in the market’s resurgence last month and its movement is likely to determine the bourse’s direction in the immediate future. The market’s gains are also being driven by investor optimism over the Saudi banks, analysts pointed out. But they remained cautious on the outlook for the retail sector.
National Commercial Bank was the top performer on the index last month, delivering a monthly retu of 32.77 percent in October 2016, according to analysts from Al-Rajhi Capital Research.
It said that major advancing sectors last month were Industrial Investments, Banks and Financial Services, Real Estate, Hotel and Transport which rose 14.1 percent, 12.3 percent, 11.0 percent, 10.0 percent and 8.2 percent, respectively.
The market has been surging since Riyadh’s $17.5 billion foreign bond issue last month eased conce about govement finances and banking system liquidity.
A major part of the bonds was sold outside the Middle Easte region, unlike Qatar’s bond sale early this year, Al-Rajhi Capital stated.
The bond sale is expected to help Saudi Arabia to manage the expected budget deficit. The successful issuance is also expected to ease the pressure on Saudi Arabia’s foreign reserve assets. Fitch has meanwhile assigned "AA-" rating to the inteational bond.
Jason Tuvey, Middle East Economist at Capital Economics Ltd., told Arab News: “I think the inteational bond issuance has resulted in a general boost to investor sentiment toward Saudi Arabia, underlining that the Kingdom has strong buffers to deal with a prolonged period of low oil prices.”
Tuvey added: “Specific sectors, such as construction and banking, have been further supported by recent govement actions such as the resumption of payments to contractors and moves to inject liquidity and bolster SAMA’s liquidity provision facilities.”
On Monday, Reuters said petrochemical producers were buoyed by a 1.2 percent rebound in Brent oil futures, with the sector’s index climbing 1.8 percent.
But food producer Savola Group, which has business lines in Egypt, dropped 0.3 percent after saying the devaluation of the Egyptian pound would hit its fourth-quarter results by SR171 million ($45.6 million).
“There is some upside potential for stocks, especially construction given the recent moves to ease liquidity and — potentially at least — address payment delays. That said, the upside for oil will hinge mainly on the implementation of the OPEC agreement, and that has big question marks involving Iran, Iraq and Russia,” James Reeve, deputy chief economist and assistant general manager at Samba Financial Group, told Arab News.
Reeve said: “Moreover, we still expect govement spending to be cut again next year and the economy will remain in recession for at least a further six months. So any bounce in the Tadawul is likely to be short-lived.”
The retail sector outperformed Monday, extending Sunday’s strong gains. Apparel and mall operator Fawaz Alhokair gained 2.9 percent. Economists, however, sounded caution about the outlook for retail stocks in the wake of the recent announcement about an increase in municipal tax. The govement has announced plans to raise municipal fees for services such as business licensing to increase revenues as its oil income sags because of low global crude prices.
The new fees, which also include charges for operating telecommunications towers and banks’ automated teller machines, will take effect on Dec. 9, the Ministry of Municipal and Rural Affairs said.
“We believe that the municipal fee impact had not been factored into the stock prices. Hence, we do not expect an extended relief rally on this news,” Al-Rajhi analysts stated.
“We still prefer to stay cautious on the retail sector as the major conce is still the demand side, especially after the recent austerity measures taken by the govement. In the current environment, we prefer stocks with higher revenue visibility. Hence, Almarai and Al-Othaim top our pecking order as relatively safer stocks, which have high/near complete exposure to non-discretionary products,” they added.
Commenting on TASI’s gains, Fawaz Al-Fawaz, a Riyadh-based economic consultant, told Arab News: “It is sign of increasing confidence in the govement public finances. The market is reacting to series of good news on the public finance front.”