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05 December 2023

Saudi markets have right ingredients for growth

By Bhaskar Raj


The Saudi Arabian securities market is expected to witness a positive momentum throughout 2008, according to UAE-based investment bank Shuaa Capital.

Shuaa said in its report on the Saudi equity markets, titled Vision 2008, that the gains are likely to be driven by a stronger earnings growth and a benign economic environment, supported by burgeoning optimism in the market at a time of lower interest rates and accumulating liquidity.

The report forecast nominal gross domestic product (GDP) will grow at about 16 per cent to reach $435 billion (Dh1.59 trillion), with real growth of about 7.3 per cent.

The Saudi equity market managed to record a convincing recovery in 2007 culminating in a 41 per cent gain for the benchmark Tadawul All Share Index, compared to a 53 per cent loss for the preceding year.
The recovery proved to be steep, as it was initiated during the second half of the year, and resulted in a 63 per cent rise from three-year lows reached in June 2007. “The wild card is the possibility of opening the market to direct foreign investment, which could generate significant and sustained fund flows,” it said.

While corporate earnings growth anticipated for 2007 remains in double digit territory, it represents a softening compared to preceding years.
Earnings growth for 2008 is expected to recover to about 20 per cent, boosted by significantly expanding earnings recorded by the banking sector, which was the main culprit behind the lower aggregate growth in 2007.
The sector’s profitability will be underpinned by continuing brisk growth in the mainstay spread business, but will receive a significant boost by a more active capital market, despite competition from new entrants into the activity.

The Shuaa report warned that the anticipated record primary market activity for the year could also present a risk to liquidity, especially if the market remains a closed liquidity cycle. The market would witness significant and sustained flows of international funds in the event of more market liberalisation and opening up of the ‘final frontier’ among large emerging markets, the report said.

“We believe that the most likely scenario entails a gradual approach that allows ‘qualified’ institutional investors access to the market, not unlike what has been adopted by the Indian capital market authority in terms of Foreign Institutional Investor licences,” it said.

No less than 20 offerings are expected for the year, at a total size of $12bn. This figure corresponds to 10 per cent of the annual trading volume of the market, and highlights the scale of local liquidity that is likely to be drawn out in the event that the market remains closed to international investors for the duration of the year.

This year has already witnessed the closing of a sizable IPO, with the offering of a 25 per cent stake in Petro Rabigh that raised $1.23bn.