Saudi Arabia - Small and mid-cap shares would see pocket of opportunities in the Saudi bourse and the Tadawul All Share Index (TASI) could gain 6% from the current base and attain a level of 12,647, says Al Rajhi Capital Research.

“In our view, banks and petchem could see limited upside from the current levels that would weigh on the index. At the same time, we believe pockets of opportunities will continue to exist in small and mid- cap stocks,” Al Rajhi said in its Q1 2024 equity market outlook and insights from fund manager survey.

Sector preference

Al Rajhi’s most preferred sectors are Tourism, Logistics, Insurance, Pharma Manufacturers, and Information Technology.

Its least preferred sectors are cement, healthcare and petchem and its neutrally viewed sectors are banks, retail and food & beverage.

Al Rajhi’s top picks are Lumi, Seera, Budget Saudi, Arabian Drilling, Luberef, Solutions, 2P, TAM Development, Alkhorayef, SISCO, Al Arabia, Jamjoom, GIG SA and Saudi Re.

Meanwhile, in 2023, the strong performance in small and mid- caps was completely masked by the banking sector (up only 6%). TASI-ex banks grew by 19%. Moreover, the average price gains in small and mid-caps were 32% (market cap below SR10 billion ($2.67 billion).

Strategy and key sector views

Al Rajhi believes there is still some upside in a few blue-chip stocks although the upside may be limited to single digits for the Index. Sectors like petchem and some banking stocks will be laggards, but service-oriented sector will continue to grow.

Moreover, Aramco, which is the highest-weighted stock in TASI also seems to have limited upside potential.

Oil view

Al Rajhi believes the average oil prices to be range bound between $75-85/bbl taking into account Opec’s discipline. As indicated by the OECD inventory levels, there is no oversupply in the market and the physical market is still balanced despite the weak paper market.

Although inventory is still above 2022 levels, the discipline of Opec in implementing production cuts would further improve the oil market balance.

View on rates and US macro

Al Rajhi conducted a fund manager survey that received 31 Reponses. In the survey, most of the fund managers voted for 3 rate cuts and “we believe the same, as we are in the camp of soft landing rather than a recession”.

Al Rajhi’s view of soft landing is underpinned by the job opening and unemployment data in the US. The unemployment data looks resilient as it declined to 3.7% as of November 2023, well below the 5% level. Besides, the job openings in US are declining and reaching pre-covid levels suggesting the softening labor force in America.

Hence, Al Rajhi does not build in the possibilities of a recession. Moreover, the wage growth levels were at 2.8% in 2018 and peaked in 2020. The recent wage growth number has gradually declined to 4% over the past few months illustrating further downside towards the pre covid levels. 

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