08/11/2016 05:48 AST
Oil was a key factor in the Saudi stock market’s resurgence last month and its movement will determine the bourse’s direction in the immediate future.
Last month, the Tadawul posted gains of nearly 7 per cent, as sentiment was boosted by the successful issuance of US$17.5 billion of sovereign bonds and the possibility of an Opec deal to cut oil production.
On the other hand, UAE and Qatari markets, which have outperformed on a relative basis this year, experienced some profit-taking, correcting by 4.8 per cent and 2.5 per cent, respectively.
The long-awaited sovereign bond issue was completed last month from an oversubscribed order book of $67bn. It was the largest bond issue of the year, ahead of Argentina, which raised $16.5bn in April. The kingdom’s new 10-year bonds were sold at a yield of 3.25 per cent, 30 basis points above similar Qatari notes.
According to investment bankers, the Saudi deal had attracted interest from a broad range of investors beyond the traditional buyers of dedicated emerging market debt, with Asian central banks, European sovereign wealth funds and Middle Eastern banks all participating in the deal.
The Saudi Arabian Monetary Authority, the country’s central bank, recently announced that it was introducing a 90-day repo facility to help manage liquidity in the domestic market. Last month, Sama introduced seven and 28-day repos.
The announcement provides further momentum to the Saudi banking sector and eased the Saudi interbank offered rate spread over the London interbank offered rate. The three-month Sibor fell by 4 basis points to 2.3 per cent since the announcement, however, it still remains high when compared with 1.54 per cent at the end of last year.
The Saudi market rallied pursuant to the bond issue, ease of liquidity and comments from finance ministry officials that payments to contractors could gather pace.
We are circumspect that the bond issuance can fully address liquidity issues in the banking sector but recognise that this is a very positive step that addresses a number of concerns.
The oil price also recovered sharply from $45 per barrel to $53 last month after the Opec announcement in September that the group would cap production between 32.5 million and 33 million barrels per day. However, oil later declined after non-Opec producers made no specific commitment to join the group in limiting oil output levels.
According to media reports, Opec members have not agreed on a single set of production figures from which to make a cutback while members including Iraq, Iran, Libya and Nigeria have asked for special exemption from any output cut.
Russia has stated that it is ready to cut only if Opec members finalise the allocation of production cuts.
If Opec members can reach agreement on production cuts before their next meeting on November 30, it will be positive for oil prices. Odds are evenly balanced given the complexity of the situation. Fundamentally, oil inventory in the US continues to decline, whereas the oil rig count continues to rise.
So far, 108 out of 155 companies in the S&P Pan Arab Large Mid Cap Index have reported third-quarter earnings. Overall earnings have largely been in line with estimates. But with the slowdown in economic growth and implementation of various austerity measures some companies have experienced a decline in revenue and earnings.
Sequentially telecoms, banks and oil and gas were the major drivers of negative growth. In the utility sector, Saudi Electricity stood out, delivering stellar financial results as the company benefited from higher tariff charges and the summer season.
We think the upcoming Opec meeting, Saudi budget and the fast-approaching dividend season will be key events for the region. In addition, global factors such as the outcome of the US elections and possib
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