Saudi Arabia's corporate earnings growth in 2018 will be driven by the banking and petrochemical sectors, according to SICO, a Bahrain-based investment bank.
"Corporate earnings growth is another driver of returns which turned positive in 2017 after two consecutive years of contraction. We expect earnings growth will come primarily from the banking and petrochemical sectors,” said Shakeel Sarwar, head of equities asset management, SICO.
“We expect an approximately 25 percent market return in 2018 and 2019, with 10 percent resulting from a price to earnings expansion, which takes the market ratio of trailing price to earnings to 18 to 19 times, which is not very expensive," he added.
SICO expects many stocks to benefit from cyclical trends and structural changes such as rising interest rate environment will boost profits in the banking sector; global growth and rising oil prices will support petrochemical sector while Saudisation, subsidy cuts, and taxes will help retail sector firms to gain market share.
Meanwhile, the bank said Saudi equity market has been gaining momentum, as it heads for possible inclusion in MSCI’s emerging market index this year, following the FTSE upgrade last month.
The Saudi Stock Exchange (Tadawul) is up 15 percent mainly on the back of news surrounding the market’s upgrade by FTSE and MSCI, which is expected to result in passive fund inflows of $15 billion.
“This rally is underpinned by fundamental factors such as corporate earnings growth and supportive themes in a number of sectors,” Sarwar said.
Large capital liquid stocks, which are set to prominently feature in the indices, have been the main beneficiary of the rally, he added.
Although SICO expects passive flows to start from March 2019 onwards, it said active funds benchmarked to these indices have already started positioning themselves before the (MSCI) possible upgrade with a $2.5 billion year-to-date investment.
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