Saudi Arabia - Facing the double whammy of rising interest rates and inflation, the Saudi Arabian bourse is better placed to outperform the global equity markets, according to Al Rajhi Capital Research.

This is because the structure of the Saudi equity markets, dominated by banks and energy, position it well enough to tackle the twin threats.

The results of Al Rajhi’s fund manager survey (51 responses), conducted from April 12 to 18, confirm this view.

Banks to perform well

Regarding sectors, most participants voted banks to outperform followed by petrochemicals, software and services and healthcare. This indicates that the buy side’s view is driven by the current macro developments, which is dominated by headlines over the US Fed rising interest rates and inflationary environment across the world.

Saudi banks, that have high exposure to CASA (Current Account and Savings Account), would notably benefit from higher interest rates supported by better NIMS (Net Interest Margin Securities). On the other hand, both petrochemicals and healthcare are considered to provide a decent hedge against inflation.

The software and services could continue to benefit from the digitisation trend in KSA, however, we are cautious about the rise in wages in the IT sector.

Insurance, food and beverages to underperform

In terms of underperformers, the buy side’s view is insurance and food and beverages would underperform the most followed by retail. “We do not disagree, except for insurance, where we believe the sector could recover from last year’s impact of high loss ratios and weak pricing environment,” says Al Rajhi.

In the absence of another wave of Covid-19, the insurance sector would see notable growth as the sector has been seeing improvement in pricing since Q4 2021. Bupa Arabia, recently, mentioned that the price increases this year could be in high teens (excluding Covid-19 coverage and CCHI ToB update).

On food and beverages and retail, inflation would be a major concern in 2022. The Q1 2022 results from Jarir, Extra and the cautious tone from Almarai’s management (during its Q1 2022 call) on its ability to protect the margins in light of the high inflation, all point towards 2022 to be a difficult year for these sectors.

Supply chain constraints to hit retail

For the retail sector, the prevailing issue of supply chain constraints would be an additional burden (please check Al Rajhi’s report published early 2022).

Another sector, that could be a victim of inflation is the construction and building materials, which as per the survey is third on the list of impact from inflation after Food and Agri and retail.

In Al Rajhi’s recent report, it was highlighted that the inflationary trend in construction materials would continue, as Russia and Ukraine, together are the second largest steel exporters globally. This in turn is likely to impact construction spending in KSA, with the possibility of Mega and Giga project execution getting affected.

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