Analysts flag winning sectors ahead of Powell's speech

Investors are focussing on the Jackson Hole Economic Symposium this week, where Federal Reserve Chairman Jerome Powell is scheduled to deliver a highly anticipated speech on Friday, amid growing expectations that an interest rate cut is possible at the September meeting.

The recently released US labor data showed weaker growth than previously estimated. At the same time, inflation indicators began to decelerate at a faster pace than expected, reinforcing market conviction that the Fed is now forced to ease its tight monetary policy.

According to data from the Atlanta Federal Reserve, markets currently price in a 65% chance of a 25-basis point (bps) cut in September, and a 15% chance of a 50-bps cut.

Analysts told Argaam that the market will benefit significantly from the interest rate cut, adding that the impact will vary from sector to sector. Sectors that will benefit most include banks that focus on consumer finance, real estate and petrochemicals, they said.

Positive Impact on Highly Leveraged Companies

Eyad Gholam, Head of Equity Research at SNB Capital

Eyad Gholam, Head of Equity Research at SNB Capital, expects the Federal Reserve to move to rate cut in September, which could be followed by a similar move from the Saudi Central Bank (SAMA).

He told Argaam that the direct impact on the Saudi market may be limited in the short term, stressing that, hwoever, the overall trend is positive and sends a positive message in the short term.

Meanwhile, highly leveraged companies will be among the main beneficiaries across various sectors, given the decline in financing costs and its impact on profitability levels. Banks that focus on retail financing will benefit more than their counterparts that rely on corporate financing, according to the analyst.

He clarified that the interest rate cut could help boost liquidity levels and support the return of some investments from debt markets to the stock market, particularly in companies with sustainable dividends and attractive returns, as well as companies with attractive valuations for investors.

Real Estate, Petchem Key Beneficiaries

Ashar Saleem, board member at CFA Society Saudi Arabia

For his part, Ashar Saleem, board member at CFA Society Saudi Arabia said that the wider market is likely to benefit substantially from a rate cut, adding that the biggest beneficiaries will be the real estate and petrochemical sectors, as well as the highly leveraged consumer sectors mainly healthcare.

“Globally, demand will get a much-needed relief from a rate cut which will directly impact the petrochemical sector positively. The real estate and consumer sector has substantial leverage and hence a rate cut will give them the much-needed relief on the cost side and furthermore the demand will pick up for real estate projects due a lower cost of borrowing,” he said.

Ashar also indicated that market liquidity and trading activity will drastically improve with a rate cut since leveraged portfolios are likely to receive a much-needed relief, noting that traders in the market have reduced their activity as well in the high-rate scenario and are very likely to return to the market once the rate cuts are in effect.

The analyst pointed out that, for every 1% drop in rate, on average leverage levels for these sectors, the earnings will improve by around 10% to 15% annually if everything else remains constant.

Impact of Interest Rate Cut to be Gradual

Mohamed Al-Laithi, Head of Reports at Argaam

For his part, Mohamed Al-Laithi, Head of Reports at Argaam, pointed out that Powell's speech represents a critical turning point in the path of interest rates, as a more hawkish tone could lead to a re-pricing of investor expectations and pressure on both stocks and bonds.

The impact of the interest rate cut on the Saudi Exchange will vary from sector to sector depending on business activity, given that companies rely on free cash flows or financing to fund projects and expansions aimed at profitability and performance growth in future financial periods, he added.

Al-Laithi also indicated that the banking sector will be among the key beneficiaries of the interest rate cut, backed by increased lending rates, as the expansion of loan volumes coupled with a decline in borrowing costs is reflected in the growth of total interest income, even if interest margins decline or remain stable.

He pointed out that Al Rajhi Bank and Saudi National Bank are among the banks that benefit most, thanks to their reliance on zero-cost current deposits (CASA), making them less affected by lower interest rates compared to peers that rely more heavily on savings or time deposits.

“Meanwhile, companies such as SABIC, ACWA Power, Saudi Electricity and Advanced will be among the main beneficiaries, due to their high financing burdens and debt levels. Financial services companies will also benefit positively through increased retail and institutional financing,” said Al-Laithi.

Additionally, REITs will also benefit positively from the interest rate cut, given their heavy reliance on debt financing, which supports improved distributions and reduced costs. However, the impact will be felt gradually and not immediately, according to the analyst.

Al-Laithi also expected the positive impact to extend to cement and retail companies, especially those with long-term obligations and high debt, exceeding 200% of equity, such as Lazurde, Zamil, Advanced and Petro Rabigh.

Stronger Liquidity, Trading Activity Depends on Oil Prices, Government Spending

Commenting on liquidity, Al-Laithi stressed that interest rate cuts typically require 9-12 months for their full impact on the overall economy to be felt, adding that stock markets react more quickly in anticipation of potential outcomes.

He also pointed out that the direct impact will be to boost liquidity levels in the short and long term by injecting more cash flows from individuals and institutions, provided that this coincides with oil prices stabilizing above $60 per barrel and the continued momentum of government spending.