Saudi bourse gains hint at return of confidence

23/03/2010 00:00 AST

Saudi Arabia's stock market underperformed most other bourses in 2009 because of low investor confidence but massive gains so far this year point to a return of confidence, a Saudi investment firm said yesterday.

The market was mainly hit by a severe debt default crisis involving the two Saudi Saad and Algosaibi family conglomerates but a sharp rise in the first three months of this year showed the exchange is recovering and could end the year hither by nearly 10 per cent, Jadwa Investment said in a 10-page study on the Saudi Tadawul bourse, sent to Emirates business.

Its figures showed the Saudi Stock Market Index (TSAI) had made steady gains since the start of 2010 to surpass its 2009 peak and reach 6700 points on March 20, nearly 62 per cent above the five-year low it reached in March 2009.

"This rally has taken place with low volumes and investors remain cautious. Based on our forecasts for earnings in 2010, we put the fair value for the market at the end of this year at 7,400, implying a gain of 10 per cent from the current level, which may not be enough to trigger a significant rise in volumes," it said.

"The TASI has underperformed leading global and emerging markets in large part because of the damage to confidence caused by defaults at two large private sector companies and tight credit conditions, though it has outperformed other markets in the GCC. So far in 2010 performance has picked up independently of conditions on global markets, an encouraging sign that investor confidence in the prospects for corporate earnings may be improving."

The report expected earnings per share to rise by 8.2 percent this year, adding that the multi-investment and petrochemical sectors could record the strongest gains, as they recover from low prices, equities and other assets in 2009. Most of the expected gains in these sectors have already been priced in to the market.

"In contrast, we think worries about bad loans in the banking sector and land prices for the real estate sector are overdone and view these as two of the most attractive sectors for investors in 2010. The other sectors that we favour [telecom, retail and the food processors within the agricultural sector] are consistent with a revival of consumer spending."

According to Jadwa, consumer spending was held back last year as consumers were affected by stock market losses, but unlike in most other countries there were not a significant number of redundancies or pay cuts and it appears that much of the slowdown in consumer spending was precautionary.

It noted that government spending remains the main factor driving forward the economy, but said that this is already reflected in share valuations.

"Historically, the TASI has tended to overshoot fair value and there is a chance that this could happen again this year. The key to how far the market deviates from fair value is investor sentiment. This is improving, but given the modest gains we expect for the TASI over 2010, we do not see an overwhelming surge of enthusiasm for the market as has happened in previous years."

The report said a consistent flow of new listings and a possible revision to the method of foreign investor participation in the market that would lift inflows would boost confidence, but added that this could be offset by a fairly weak performance by global markets and a weakening global economic recovery.

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