Saudi stocks drop 4% but market fundamentals remain strong

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The worsening geopolitical situation in the region is being used as an excuse by investors to take profit from recent gains in the Saudi stock market, a senior analyst told Arab News.
“In the short-term, higher oil prices will act as a hedge, and over the longer-term, we believe the fundamentals of the Saudi market remain strong,” Farouk Miah, head of equity research at NCB Capital, said.
His remarks came as the Tadawul All-Share Index tumbled 4.1 percent, its largest one-day loss since August 2011, to below the psychologically important 8,000-point level. The index closed at 7,722.70 points.
The heavyweight petrochemicals sector slid 3.5 percent despite rising global oil prices, while the banking sector, the other main weight in the market, also fell 3.5 percent.
Farouk Miah added: “The Saudi market has performed strongly so far this year and also in the last few weeks. So a correction was expected.”
Also on Tuesday, official data revealed that Saudi Arabian Monetary Agency’s (SAMA’s) net foreign assets reached a record high of SR2.549 trillion in July.
Saudi Arabia’s M3 money supply growth accelerated to 15 percent year-on-year at the end of July from 14 percent in the previous month, central bank data showed.
“As reserve grows, government will be comfortable in spending more, which will have positive effects on all economic sectors, especially those related to local demand, like retail, cement, and construction,” Beshr Bakheet, chairman of Bakheet Investment Group, said in his reaction to the latest data.
Commenting on Tadawuls’s decline, Fahad Alturki, head of research at Jadwa Investment, said: “Until yesterday (Monday), the TASI’s monthly performance was positive, gaining 1.8 percent since the close of July. The escalation of the unrest in Syria and the increasing likelihood of a US military intervention and fears of it spreading outside Syria have weighed on the general sentiments of the market on Tuesday pushing the market deep into the red side, though the market remained 13.5 percent higher than end of December.”
He added: “The drop was larger in smaller sectors while sectors with relatively strong economic fundamentals suffered less. This negative sentiment is likely to weigh on the market for a few more sessions until the picture becomes clearer.”
John Sfakianakis, chief investment strategist at Masic, a Riyadh-based investment firm, said: “The reason for today’s dive was geopolitical concerns over Syria. Nowhere to hide as markets in the region declined but keep in mind that the rally was also pretty steep for many names in the region. Selling pressure was widespread due to the retail base of many of these markets and retail investors tend to overreact all too often. What next? I won’t be surprised if another dip takes place region-wide.”
Sfakianakis, however, said: “Economically the region is doing very well so as we get more understanding there will significant liquidity coming into the market but not immediately. Remember that the June dip of more than 4 percent took more than two weeks to see its full recovery. Barring geopolitics, the market should do well over during the second half. “
Referring to the Real Estate Development index, which dropped over 7 percent, Sfakianakis said: “The real estate names have corrected over the last few days but the market has been in a corrective mode over the last two days as local investors booked some profits across all major names.”
He added: “Real estate does not have a significant weight on the overall index, so when real estate names correct it has a negligible effect on the overall performance of the stock market. The real estate sector has had a very good rally over the last few months and a correction is due. Some names have grown by more than 30 percent in a few months and investors want to take some profits.”
Sfakianakis said: “The majority of the companies publicly traded should benefit from the high demand in real estate projects be it in the form of housing or bigger development projects that are partly residential, commercial and industrial.”
Bakheet expressed his geopolitical concerns over the possibility of international direct intervention in Syria and its consequences on the region.
“We believe that market overreacted to the news, it was a buying (not selling) opportunity for investors,” he added.
The market turnover reached over SR8.49 billion.
Commenting on this, Bakheet said: “When huge movements in the market usually coupled with higher than usual volume (and what happened today) it implies more buyers than yesterday which is positive!”
Reacting to the 7 percent fall in the insurance sector, Bakheet said: “Trading in the insurance sector is usually dominated by speculators and most of its share movement is not based on fundamentals.”
Basil Al-Ghalayini, CEO of BMG Financial Group, said: “The geopolitical situation in the region is creating a lot of tension among investors. The latest announcements by the White House coupled with others by European leaders regarding the Syrian situation have led to uncertainties in the investment climate within the regional markets.”
Fawaz Al-Fawaz, a Riyadh-based economic consultant, said: “The reason for the decline in the Saudi stock market is the untimely confluence of two factors, one the Saudi market rose about 20 percent until the last few days and hence it was due for a profit-taking, a mild correction of sorts, and two the market like any other is affected by the talk of war, as market hates uncertainties.”
He said: “I think it is over reaction as markets tend to do that during political events, while the fundamentals are still sound; the fiscal positions are very strong, the government is undertaking massive infrastructure expansions, and finally the profitability of Saudi companies is positive on the whole. I cannot predict the market direction but the environment is friendly especially since there is no known oversupply on new issues on the horizon.”
Jarmo T. Kotilaine, a regional analyst, said: “It seems that the main worry on investors’ minds, reflecting the global market sentiment, is the possibility of a Western military action again the Assad regime in Syria. Given the uncertainty about its scale, impact, and implications, the risk mood is likely to be on.”
He said: “The fundamentals for the market still look good even if the headline pace of growth will likely be slower than last year. The main source of potential volatility is likely to be external factors, ranging from Syria to the impact of scaling back quantitative easing in the United States and the related worries about global liquidity.”
Basil Kabbani of Zughaibi & Kabbani Financial Consultants in Jeddah commented: “Tuesday’s plunge in stock prices can be attributed to the US threats to attack Syrian targets which may convert to a larger regional proxy war.”
He added: “The situation directly impacts real estate sector, which outpour liquidity aggregating to SR8.5 billion. Perhaps, buying side aims to profit in a hope that the market will resume its run-up soon.”

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