Further easing of liquidity, inflow of foreign capital through direct investment and QFI route building up reserves will raise local employment levels leading to increased local market consumption, and steady decline in current account deficit due to elevated oil prices, among others, Al Rajhi Capital said in its Outlook report titled "Saudi Arabia Yearbook – Outlook 2017: Year of implementation with clearer skies". The report also said 2017 will be an important year for the Saudi capital markets as there are a number of market reforms in pipeline which could improve Tadawul's chances to be included in the MSCI EM Index, Al Rajhi Capital said in its Outlook report titled "Saudi Arabia Yearbook – Outlook 2017: Year of implementation with clearer skies". "It will be an important year for oil as well as investors are likely to observe OPEC and non-OPEC compliance to the agreed limits and the potential reaction of other producers such as shale. Overall, reduced downside risks to oil prices will enhance Government's ability to pursue NTP 2020 plans while providing more room for fiscal measures and reducing short term impacts on economy," the report said. After a 30% rally in TASI since mid-October, the report said "we believe there is limited further upside potential in the near-term. Al Rajhi Capital continues to believe that the large cap companies with stable business models and diversified revenue streams in core sectors will fare better and show resilience in times of uncertainty." Moreover, the report said 2017 is expected to be a key year of implementation of Vision 2030 and NTP 2020 plans as the Kingdom pursues its economic transformation. With a significant number of reforms lined up and implementation gathering pace, the Government's role is likely to move from that of a key capital contributor in the past to that of a regulator/facilitator/partner, opening up abundant opportunities for the private sector. Other key trends expected for 2017: Consumer spending: Down-trading expected, volumes unlikely to be impacted: The recent cut in allowances of some public sector employees led to concerns about the impact of the cut in disposable income on the Saudi economy. Our analysis shows that as the increase in real spending in the past was lower for Saudi households in the first place, consumers will find it tough to cut back real spending in the current environment and instead down-trading (choosing lower priced alternatives) would be the preferred response of consumers. Easing SAIBOR could ease incremental interest burden: 3M SAIBOR has been continuously falling to 2.034% currently, down from a high of 2.386% in October. Our analysis had indicated that a 100bps increase in SAIBOR could result in a 7.4% potential negative impact on the aggregate TASI net profit. Now with the SAIBOR falling back to near 2% mark, incremental interest burden would further ease for the companies. Even though the overall liquidity has eased the SAIBOR level, SAIBOR could rise again if Fed rates continue its upward trajectory. Increasing participation of institutions: Saudi Individuals have been net sellers in the Saudi equity market consistently, while Saudi institutions have been net buyers. Thereby, the Saudi market has seen a drop in ownership among Saudi Individuals over the last few years and increasing ownership by Government Related Entities (GREs). Apart from the obvious impact of net buying, the ownership gain of Saudi Institutions is also due to the outperformance of key government-owned entities (e.g. SABIC, STC, Ma'aden, Bahri etc.) vs. the broader market. Apart from GREs, Saudi Mutual Funds have also witnessed an increase in market ownership. Tadawul better positioned vs. broader economy: While private sector investments are likely to increase gradually boosting overall market liquidity and optimism, we believe that Tadawul is likely to remain better positioned. Our analysis suggests that Tadawul is not a close barometer of the broader economy due to meaningful deviations in composition of the broader economic activities and representation in Tadawul. Preferred sectors: In a bid to diversify the economy away from oil, the Kingdom is taking various steps to boost private investment and give a push to other sectors. Mining is one of the sectors which has been given importance under the Vision 2030. The real estate sector also has a special focus, with the government planning to restructure and revive the various economic cities and utilize other real estate assets with the government. Manufacturing is another sector in focus under the Vision 2030 plan, as the government looks to localize a significant percentage of its defense equipment and renewable energy purchases. The other preferred sectors for investment are healthcare, tourism and education. The report noted that the downside risks for the market are a substantial fall in oil prices, lack of sufficient private participation, faster than expected decline in Central Bank's foreign exchange reserves, and any major global economic downturn or unexpected geopolitical events. — SG
