Editor’s Note:
The Saudi stock market, the Tadawul or TASI, has declined 10 percent since the end of March, as noted in a report by Riyadh-based Jadwa Investment today. The dip is attributed to the overall struggles of the global economy. We provide that insightful report from Jadwa here for your consideration. SUSRIS thanks Jadwa Investment Chief Economist Paul Gamble for this timely report on the TASI. We also suggest you check out the recent article on the stock market assessing the opening of the Tadawul to foreign investors, “Opening the TASI: What You Need to Know.” This important analysis, by economist Hussain Abusaaq appears this week at SUSRIS companion site SUSTG.org. [If you don't subscribe to the SUSTG daily "News Review," you should. ]
[Complete report [English] with very helpful charts, graphs and tables at this link.]
[Complete report [Arabic] with very helpful charts, graphs and tables at this link.]
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Global Factors Derail TASI Momentum
The TASI has dipped over the past month, primarily due to global factors. First quarter results of listed companies point to ongoing strength in the domestic economy, with profits 14.9 percent higher than in the first quarter of 2011. Nonetheless, the TASI is down by 10 percent since the end of March, mirroring falls on global markets, which have been unnerved by weaker economic data and a heightening political backlash against austerity in the Eurozone. We had anticipated that the rapid gains in share prices over the first quarter would not be sustained and maintain our end-year projection for the T ASI of 8,050.
Net income of all listed companies in the first quarter was SR25 billion, an increase of 14.9 percent year-on-year. All bar one of the 15 sectors recorded higher profits than in the first quarter of 2011. Quarterly growth in net income, at 22.6 percent, was the fastest since the first quarter of 2010.
Although petrochemicals was the only sector to post lower earnings in the first quarter than in the corresponding period of 2011, its decline was less steep than consensus expectations. As anticipated, lower product prices hit earnings, though they were generally offset by greater sales volumes. In addition, higher prices for some feedstock dented earnings. The prices of liquefied petroleum gas (LPG) jumped in the first quarter, with propane, butane and naphtha all recording rises of over 20 percent. Unlike natural gas, which is sold at a fixed price, Aramco sells LPGs to local manufacturers at global prices less a discount (global LPG prices are influenced by oil prices).
While oil prices contributed to the petrochemicals sector posting the lowest earnings growth in the first quarter, they also played a major role in the transport sector achieving the highest quarterly earnings growth. National Shipping Company, which dominates the sector, benefited from higher oil prices as the calculation of the freight charges it receives for transporting oil are based on crude prices; Brent crude averaged 13 percent higher in the first quarter of 2012 than the same period of last year. A greater volume of Saudi oil exports (probably also around 13 percent up on the first quarter of 2011) further supported company performance.
Hotels and insurance also recorded triple-digit profit growth in comparison with the first quarter of 2011. For hotels, this was due to a one-time land sale by one of the listed companies. New product offerings and continued growth in demand resulted in a record 21 of the 31 listed insurance companies reporting profits in the first quarter. Note that insurance profits were down sharply in quarterly terms, owing to very large fourth quarter profits at two of the larger companies. Energy was the only sector to post losses in the first quarter. This is in line with the seasonal pattern and reflects low use of air conditioning. Losses for the sector were 28 percent less than in the first quarter of last year due to lower operating costs and higher sales.
Elsewhere, banks recorded healthy earnings growth because of an increase in lending and higher revenues from brokerage activities at their investment banking subsidiaries owing to a surge in stock market volumes (which were up by 163 percent year-on-year in the first quarter). Telecoms had a strong quarter, driven by Saudi Telecoms. With dominant mining company Ma’aden completing the first quarter of commercial operation at its huge diammonium phosphate complex, earnings of the industrial investment sector as a whole rose sharply in year-on-year terms.
Cement companies had a solid first quarter, as greater construction activity lifted sales by 18 percent compared to the corresponding quarter of 2011. Earnings growth for the building and construction sector remained subdued in annual terms, but there was a strong rebound in quarterly terms as all four companies that reported fourth quarter losses returned to profitability. Rents and property sales picked up significantly at a few real estate companies, prompting one to announce plans to pay dividends for the first time. A one-time property transaction also boosted earnings.
Although the results were healthy, it has been a tough six weeks for the TASI. The euphoria that lifted the index by 22 percent over the first quarter of the year and pushed the volume of shares traded to over SR21 billion per day has faded. The TASI is down by 10 percent from its 2012 high of 7,930 on April 3. Volumes fell back below SR10 billion on April 24, hitting a low of SR6.1 billion on May 8 and only retuned above this level one day since then, on May 12, the first day of trading of Najran Cement.
We outlined the reasons for surge in share prices and volumes in our 2012 stock market outlook (TASI 2012: 25 percent growth expected, issued in late March). Most of these still hold. The price-to-earnings ratio is still low on an historical basis, at 12.6, the strong economic story, availability of margin lending and less turbulent regional political environment remain. There are three factors that have deteriorated; global stock markets and oil prices have fallen and prospects for an imminent further opening of the stock market to foreign investors have faded. In addition, a tougher clampdown on speculation may have contributed to the decline.
The main reason for the fall in the TASI recently is deteriorating global sentiment, which has been reflected in declines on global stock markets. The chart to the left shows the fairly close alignment of movements in the TASI with global and regional markets, both on the way up over the first quarter and over the subsequent decline. A run of weaker data from across the world in much of April raised concerns about the health of the global economy. While recent data from the US has improved, this has not been the case in Europe. At the same time, popular dissatisfaction with austerity in the Eurozone has intensified, with ruling parties suffering in elections, which for Greece, has moved the country closer to an exit from the single currency.
These tensions have pulled down oil prices, another element that supported the earlier run-up in the TASI. In addition, the prospects of military action against Iran have diminished (owing to signs of concessions from the Iranians and the formation of the new coalition government in Israel), reducing the risk premium in oil prices. Lower regional political risk should be good for the TASI, but it has not responded to this, in the same way that it was not impacted by the earlier heightened danger of conflict with Iran. Oil prices at their current levels (Brent is $112 per barrel) are still very good for the Saudi economy and listed company earnings.
A further factor that may have contributed to the TASI’s recent fall is uncertainty over the timing of a fuller opening of the stock market to foreign investors. Although it was not based on indications from the stock market regulator, many investors had assumed that the market would be opened further to foreign investors earlier in the year after various administrative procedures to support the process were implemented. Recently, the Capital Market Authority (CMA) has indicated that the opening will take place gradually and when it thinks market conditions are appropriate. We think that opening the market remains near the top of the CMA’s agenda, and further facilitative steps are taking place, but by dampening expectations of an imminent move, some funds that entered the market in anticipation of greater foreign participation may have been withdrawn.
We maintain our view that the TASI will end the year around 8,050. Domestic fundamentals are strong and we see little that could derail the earnings momentum of local companies unless oil prices fall dramatically. Global concerns will hang over the market and pose the main risk to our outlook. Nonetheless, we assume that after a period of uncertainty there will be an improvement in global market performance later in the year, and are comfortable that the TASI can reach our end-year target.
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About Jadwa Investment - Jadwa Investment is a Saudi Closed Joint Stock company operating under the supervision of the Saudi Arabian Capital Markets Authority (CMA). Under the CMA decision published on August 21, 2006, Jadwa was awarded a license to offer all types of investment services including dealing, managing, custody, arranging and advising. All investment services offered by Jadwa Investment are supervised by a Shariah Supervisory Board and are fully Shariah-compliant.
For comments and queries you can contact the author:
Paul Gamble, Chief Economist and Head of Research
pgamble@jadwa.com
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