Welcome to Zawya Markets. Each Sunday we will be featuring an interview with a different analyst or markets expert from around the region.

If you would like to participate please email gerard.aoun@thomsonreuters.com.

1) How do you think the Saudi non-oil economy will perform for the remainder of this year and next? Is there much evidence of Vision 2030 policies filtering through in terms of economic growth yet?

Saudi non-oil revenues increased by 43 percent year-on-year in the first half of 2018, while non-oil GDP was up 1.6 percent year-on-year in the first quarter of 2018, compared with a decline in first quarter of last year. A plethora of measures are continuously being implemented, which include a lifting of the ban on women driving, Saudisation across many sectors and a revision in fuel and utility prices.
Hence, the execution part is on track but naturally there are bound to be some near-term disruptions. On the whole, we are confident about a more diversified kingdom in the future.

2) What is your view for the banking sector in Saudi Arabia?

Saudi banks are well-capitalised, despite their conservative provisioning policies. As a consequence of structural changes happening in the economy, credit growth is currently weak. However, this is being more than compensated by rising interest rates, which should bode well for banking stocks.
Currently, we do not see any signs of deterioration of asset quality, which could actually improve as oil and thereby Government spending picks up. We continue to remain optimistic on the banking sector.

3) What is your view for the cement sector?

We are deep into the down-cycle for the cement sector. After oil prices plummeted in mid-2014, while revenues of most sectors declined and gradually increased to pre-2014 levels, the cement sector’s revenues continue to remain below 2014 levels.
The sector is beset with excess capacity, high competition and weak demand, with the sector reporting losses in the last quarter. We see weak demand and high inventories continuing to weigh on the sector for the medium term.

4) What is your view for the petrochemical sector?

Given no major capacity additions, petrochemical stock prices move in-line with product – feedstock spreads and associated shutdowns.
In line with our expectation, petrochemical prices, especially basic polymers such as HDPE, LLDPE, LDPE etc. have declined by 5 percent quarter-on-quarter in the third quarter of the year so far, while propane and naphtha prices have increased by low double-digits, thus earnings are likely to weaken sequentially in the third quarter.

5) What are your views for Q3 earnings in Saudi Arabia?

Banks should continue their upward momentum, as reflected by the 19 percent year-on-year growth in earnings in July as per SAMA data, while petrochemical earnings could decline sequentially after prices peaked at the end of the second quarter. Other, smaller sectors could feel the pinch of declining expat population, VAT, the expat levy and increases in overall costs on a year-on-year basis.

6) Are we seeing a correction in the Saudi equities market?

The euphoria we saw in the market in the first half of the year was driven by improved sentiments around announcements of inclusion in MSCI and FTSE indices, along with rising oil prices.
With valuations getting rich, and also owing to overall emerging market weakness, we have seen some pull back in the market. I believe we could see these levels hold up or even gradually get better slightly post-third quarter earnings.

7) If you were to pick one Saudi stock that you think will outperform over the next six months, which one would it be (and why)?

Saudi International Petrochemical Company (SIPCHEM) and National Industrialization Company (NIC) in the petrochemical sector are our top overweight calls at the moment, given the sharp fall owing to the shutdown in the International Methanol Company (IMC), as well as fears of a weakness in Titanium dioxide’s price.
We believe it could be a good time to enter these stocks, which could give above average returns over the next year. (The recommendation was provided to Zawya on Tuesday 18th of November)

8) If you were to pick one Saudi sector that you think will outperform over the next six months, which one would it be (and why)?

In the current macro backdrop, it would be a better alternative to select stocks over theme / sector-based investing.
For example, overall sector weakness may present opportunities for market leaders, helping them to outperform the market despite being in a sector beset with challenges - as we have seen recently with (electronics retailer) Extra.

9) What is your view on oil prices?

Global oil supply demand’s equation is likely to tighten as Iranian sanctions begin on November 4.
Though China may increase its imports from Iran, one could safely expect at least one million barrel per day lower exports from Iran, implying that OPEC will play an instrumental role in managing prices.
Demand continues to be healthy, with U.S. commercial inventories below five year average rates, and OECD inventories as a proportion of global demand at levels not seen in the past five years.
Net-net, the outlook for oil prices is positive.

10) What is your view for the U.S. dollar?

There are tailwinds for the USD, such as good US GDP economy numbers, an increase in inflation because of new import tariffs and better employment numbers.
As a result, expectation of a Federal Reserve rate hike is naturally likely to increase the cost of financing in emerging markets, which could lead to a risk-off move from emerging markets.
Overall, we believe the outlook for US dollar looks positive.

(Editing by Gerard Aoun and Michael Fahy)

Any opinions expressed here are the author’s own.

If you would like to participate in the Zawya Markets Weekly Q&A please email gerard.aoun@thomsonreuters.com.

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