Analysts flag winning sectors ahead of Powell's speech

Investors are focusing 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 next meeting in September.

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 are currently pricing in a 65% chance of a 25-basis point (bp) cut in September, and a 15% possibility of a 50-bp reduction.

Analysts told Argaam that an interest rate cut significantly bodes well, adding that the impact will vary from sector to sector. Sectors that will benefit the most include consumer finance-focused banks, 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, forecasts the Federal Reserve to move to a rate cut in September, with the Saudi Central Bank (SAMA) following suit.

He told Argaam that the direct impact on the Saudi market may be short-lived. However, the overall trend is positive and bodes well in the short term.

Meanwhile, highly leveraged companies will be among key 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 research head.

He clarified that lower interest rates could help boost liquidity levels and support the return of some investments from debt to the stock market, particularly enterprises with sustainable dividends and lucrative returns, as well as those with attractive valuations for investors.

Real Estate & Petchem: Key Beneficiaries

Ashar Saleem, board member at CFA Society Saudi Arabia

On his part, Ashar Saleem, board member at CFA Society Saudi Arabia, said the wider market is likely to benefit substantially from a rate cut, adding that top 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 sectors have substantial leverage; hence a rate cut will give them a breather on the cost side. Further, demand is likely to pick up for real estate projects due to lower borrowing costs,” he was quoted as saying.

He also indicated that market liquidity and trading activity will drastically improve in the wake of a rate cut since leveraged portfolios are bound to receive a longed-for relief.

While traders have already trimmed their activity in the high-rate scenario, they are very likely to make a comeback once lower rates come to life, Saleem highlighted.

For every 1% rate reduction on average leverage levels for these sectors, corporate earnings will improve by around 10-15% annually if all other determinants remain intact, he further stated.

Impact of Interest Rate Cut to Reflect Gradually

Mohamed Al-Laithy, Head of Reports at Argaam Financial Portal