These factors will impact Tadawul in the coming period

The Tadawul All Share Index (TASI), Saudi Arabia’s benchmark, has witnessed lower activity and volatility— though on a smaller scale— due to a sustained slump in crude prices and a summer lull. But, going forward, there are several driving factors that may help support the market, analysts say.

Despite shedding 3 percent in August, Tadawul kicked off September in positive territory, and then lost momentum, owing to slippery oil prices. Speculations about record-high crude output coming from Saudi Arabia in August exacerbated concerns of a glut. In the last week of August, the market also turned cautious as a hike in US interest rates seemed likely following Federal Reserve Chair Janet Yellen’s speech.

Despite its strong fundamentals, Tadawul has been impacted by negative sentiment and persistently low oil prices. Market analysts in the GCC, however, say several developments may help nudge the $400 billion exchange into positive territory in the coming period.

Saudi-based Jadwa Investment said in a research note this week that it expects the TASI to pick up in mid-September after the Eid al-Adha break and long summer holiday, when investors return to the kingdom.

“The more subdued trading in TASI during August has further pushed down the price-to-earnings, putting it at discount to many regional and emerging market peers,” Jadwa added.

Driving Factors

Although it didn’t outline immediate plans to slash output, the Saudi-Russian deal to create a working group to cooperate on stabilizing oil prices will also be a key factor that may offer support to the TASI – which gained 1.3 per cent on Monday, September 5.

The market’s easing of investment rules, sustained growth in non-oil sector, and a positive sentiment ahead of the planned IPO of state-owned oil giant Saudi Aramco are all drivers that could help boost the Tadawul All Share Index, which gained 1.3 percent on Monday, September 5.

The planned five percent public offering of Aramco shares to the public will provide a much needed boost to the Saudi economy and to the markets, Gary Dugan, Chief Investment Officer at Emirates NBD, had said in a study released in April.

Immediate catalysts for the market would be inclusion in the MSCI Emerging Markets Index and the easing of Qualified Foreign Institution  restrictions, he added.

Saudi Economic Reforms

While stock valuations are trading at highly attractive levels for foreign institutional investors, the inflow of foreign funds will come overnight, and will be slow and sustained. It will also come parallel with growing trust in the kingdom’s economic policies, decreased dependence on oil, and diversification plans.

It was reported Tuesday that Saudi Arabia is currently reviewing projects worth about SAR 260 billion ($69 billion) and is considering cancelling about a third of them, as well as cutting its ministry budgets by about a quarter in order to slash spending, sources close to the talks told Bloomberg. The steps would be unprecedented by the world’s largest oil exporter, but show that the kingdom is serious about changing its economic policies.

Meanwhile, a survey released by Dubai-based Emirates NBD and IHS Markit has confirmed that the kingdom’s non-oil sector is on an upward trajectory for the second month on the trot in August with output and new business remaining the key growth drivers– both rose sharply and more quickly than in July.

“The rise in the Emirates NBD Saudi Arabia PMI to the highest level in a year is encouraging, although we note that the average PMI so far this year is still below 2015 level, indicating a slower rate of private sector growth, said Khatija Haque, Head of MENA Research at Emirates NBD. “Stronger export demand has helped support overall new orders, and more firms have increased hiring in August as well.”

The kingdom’s budget deficit widened to 16 percent of gross domestic product last year. The International Monetary Fund (IMF) in August said it expects the deficit to narrow to 9.6 percent in 2017.

Jadwa Investment said it expects actual GDP to decline to 1.7 percent in 2016, compared to 3.5 percent in 2015, before rising again to 2.4 percent in 2017.

Fiscal deficit, on the other hand, is expected to decrease to SAR 283 billion in 2016, before easing to SAR 210 billion in 2017, it added.