30/12/2015 06:21 AST
A plunge in Saudi Arabia’s Tadawul index by as much as 3.23 per cent in the first half an hour of trade on Tuesday may very well be just the first in a train of troubles for the kingdom’s market, analysts said.
The Tadawul All Share index reached a low of 6,761 in early trade following the Saudi budget announcement on Monday that included a 367 billion riyals deficit. The index managed to gradually climb throughout the rest of the day, however, ending with a 0.88 per cent dip to reach 6,930.6.
The kingdom’s petrochemical sector as well as its energy sector saw the largest plunge on Tadawul, with the petrochemical gauge falling 3.77 per cent, and the energy gauge dropping 5.26 per cent.
The drop followed an announcement from the Saudi government just a day earlier about a budget of 840 billion riyals for 2016 — a drop from the 975 billion riyal budget this year. The government added that it was planning to cut spending in 2016, with cuts being seen in energy subsidies as petrol prices were hiked over 50 per cent.
Mohammad Yasin, managing director of the National Bank of Abu Dhabi’s Securities, said that companies will need some time to adjust and restructure.
“I think for 2016, we’re looking at a very flat year at best in terms of performance of companies if we don’t see a decrease in profits, which should be expected, and therefore, the stock market will reflect that.
I think what’s important in this budget is that at least they have taken the worst case scenario for oil prices of around $25-$30 for 2016, which means that if this is the worst case, any better-than-expected prices will reflect positively on the deficit and on the stock market,” he said.
While Yasin said he expected “tough times” in the next few months, he said that this could translate to greater upside on the long term.
He added that a key concern in the kingdom is the cost of the war in Yemen that could put further pressure on the deficit and hence, on equity markets, if a resolution is not reached soon.
“Based on this budget, we have to adjust for lower company profits, so I would say there should be a negative impact on the Tadawul index for the first half of the year. Hopefully, the savings the government has done over the past decade will help weather some of the challenges,” Yasin said.
From a technical standpoint, the Tadawul All Share index is expected to reach 6,500 in the first quarter of 2016, Analyst Osama Al Ashry said.
“I think the Saudi market can even drop below the 6,000 level in the first quarter because it is already closing this year at its lowest levels. In 2014, the index reached 11,200, and dropped to a low of 6,600 in 2015, so I do expect it to fall further,” Al Ashry, a member of UK organisation, Society of Technical Analysts, said.
Saudi Basic Industries Corp, one of the world’s largest chemicals manufacturers, was the biggest contributor to declines in Saudi stocks. The company fell 5.5 per cent, the most in four months. Sahara Petrochemical Co., which also manufactures chemicals, sank to the lowest level since April 2009, Bloomberg reported.
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