DUBAI (Reuters) – Saudi Arabia’s record budget for 2011 will boost the kingdom’s bourse in the long term as traders bet bumper spending will translate into higher corporate profits.
Analysts are bullish about Saudi Arabia’s prospects, but some warn this year’s spending — also a record — has had little impact on listed firms, while bank lending must also increase for the market to make a sustained rally.
“There’s still a disconnect, but it probably takes time to trickle down to the private sector and with a continuation of spending it should filter through next year,” said Haissam Arabi, chief executive and fund manager at Gulfmena Alternative Investments.
Saudi Arabia plans to spend 580 billion riyals ($155 billion) in 2011 as the world’s top oil exporter tries to create jobs for its fast-growing young population.
“Saudi Arabia is still expanding its spending, focusing on education, healthcare and infrastructure and seems to also be aimed at stimulating the private sector,” said Arabi.
“The market broke above resistance at 6,500 points and I think it should go up some more. Saudi is back in focus.”
Saudi Arabia’s economy is forecast to grow 3.8 percent in 2010 and 4.3 percent the year after, according to economists polled by Reuters.
The kingdom’s index .TASI hit a seven-month high of 6,610 points on Wednesday to be up 8 percent this year, second only to Qatar in the Gulf Arab region.
The petrochemicals sector .TPISI has been the main driver behind Saudi’s gains and is up 21 percent in 2010 as rising oil prices boost petrochemical product prices and also imply increased demand.
“We are at a cross roads, waiting to see if the Q4 numbers will show that the gains in petrochemicals stocks are justified,” said a Riyadh-based trader who asked not to be identified. “With results only a couple of weeks away, people aren’t going to pump big money into the market.”
The building sector .TBCSI has gained 12 percent this month on bets increased government spending will boost revenues.
“Investors should be cautious – builders’ Q4 earnings won’t be that great, while project announcements would not feed into the bottom line for another six to eight months,” said the trader.
PETROCHEMICALS AND BANKS
Aside from petrochemicals, banks are the other main sector on the Saudi bourse, with this pair accounting for around two-thirds of market capitalisation.
The bank index .TBFSI has markedly underperformed, climbing 5.4 percent year-to-date as rising provisions and stagnant lending eat into profits, although this could change next year.
“Loan growth should pick up in the first quarter of 2011 as contractors and suppliers seek more financing,” said Rami Sidani, Schroders Middle East head of investment. “Saudi bank provisions have risen on the instruction of the central bank, but NPLs (non-performing loans) have been steady.”
With the kingdom’s central bank cautious, it could order lenders to take further provisions in the fourth quarter, Sidani warned.
“This might pressure bank stocks, but we think much of this is already priced in,” he added.
“A lot of banks’ shares have been underperforming and are priced at very attractive multiples. The main catalyst for banks will be a pick up in loan growth.”
In Egypt, politics is to the fore as investors wait on the country’s new parliament to pass economic reforms – seen boosting infrastructure, banking and housing stocks — and for hints as to who will be the ruling National Democratic Party (NDP) candidate in next year’s presidential election.
President Hosni Mubarak, 82 who is also the head of the NDP, has yet to announce whether he will seek re-election.
Mubarak, in power since 1981, had gallbladder surgery in March. If he does not seek a new term, many Egyptians see his son Gamal as a likely successor.
In his first speech to the new parliament, Mubarak said he looked forward to the new parliament passing laws to tighten state lands’ regulation and boost internal trade adding business-friendly reforms would energise new industries as the government seeks to raise annual economic growth to 8 percent over the next five years.
Egypt’s economy expanded by 4.7 percent in 2008-09 and 5.1 percent in 2009-10. Finance Minister Youssef Boutros Ghali on Dec. 13 forecast growth of 7 percent in 2011-12 and 8-8.5 percent thereafter.
Egypt’s index .EGX30 is up 3.1 percent in December, ending Wednesday at 6,910 points, and further gains are forecast in the short term.
Hisham Metwalli, a broker at Arab Finance Brokerage said a break above 7,000 points before year-end would provide a psychological boost for investors.
“(This would) lead the market to gain in the first few months in the coming year,” he added.