It has been a stellar run for the Saudi stock market during the first half of 2018, the NCB “Saudi Economic Review” for July 2018 revealed.
The index is among the top performers on a global scale, ending the month of June with a 15.1% gain since the beginning of the year.
Following a series of reforms and enhancements by the Capital Market Authority and Tadawul, the largest market in the GCC has been promoted to emerging market status by FTSE Russell and MSCI. Among the notable reforms since 2015 are opening the market to foreign investors through Qualified Financial Institutions (QFI), increasing the settlement cycle from T+0 to T+2, reclassification of sectors according to GICS standards, launching the parallel market, NUMO, as a less stringent market for companies to go public, introduced real estate investment traded funds, and several enhancements to price calculation mechanisms. These regulatory and operational improvements raised the profile of the market and aligned the market with global best practices. The FTSE inclusion process will be conducted through five tranches and is estimated to reach USD5 billion worth of inflows as Tadawul will represent 2.7% in the FTSE Emerging Market index and 0.25% in the FTSE Global Equity Index Series. Meanwhile, the two-step MSCI inclusion for Tadawul will equate around 2.6% of the MSCI Emerging Markets Index by August 2019, the larger MSCI pool might raise inflows over USD50 billion.
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On a monthly basis, the Saudi stock market registered a growth of 1.9% last month, rebounding from May’s 0.6% drop. Recently, OPEC and other oil-producing countries, namely Russia, agreed to raise production levels as oil prices rose to almost USD80/bbl and the oversupply theme has somewhat abated given the production shortages in Venezuela and Libya coupled with an expected drop in Iranian oil given the reinstated sanctions by Trump. Saudi production was raised to 10.7MMBD in June, comparatively higher than an average of 9.9MMBD in the first five months of 2018. Accordingly, these developments have reflected positively on domestic stock prices. On a sectoral level, the energy sector registered the highest gain during the month of June, rising by 7.2%, followed by the commercial and professional services sector which gained 5.9% M/M. The Media sector was the third best performer with a rise of 5.3% last month. However, the consumer durables, utilities, and retailing sectors registered declines by 6.3%, 2.7%, and 0.1%, respectively.
Market capitalization increased by 1.3% by the end of June to reach SAR1.98 trillion, which equates to a rise of 12.4% over the past twelve months. Meanwhile, the average daily traded value declined by 12.6% during June following May’s decline of 27.9% as the Ramadan season usually mutes the market’s activity. Trading has been mostly concentrated in the materials, banks, and real estate sectors representing 30.0%, 24.0%, and 15.6% of total traded values. Analyzing Tadawul’s report on ownership reveals that the majority of stocks are owned by Saudi institutions with a share of 67.1% by the end of June, followed by Saudi individuals representing 25.9% of the market’s ownership. QFIs have increased their investments in Tadawul by SAR11.9 billion during the first half of 2018 and we expect further increases in their ownership levels over the next year. Additionally, the valuations reached by the end of June, represented by the price-to-earnings ratio at 18.1, pose a challenge to the upside momentum of the market.
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