The recent rally in the Saudi market is fuelled by investor optimism and a strong performance outlook in 2012. Though the recent sharp increase in trading volume and value appears confusing considering only a slight improvement in most of the factors such as macroeconomic concerns and corporate outlook, we continue to believe that the markets are forward looking and hence have already discounted the potential negative news flow. Retail participation in the speculation activity remains the primary rally driver coupled with positive news flow. Bankers and brokers have confirmed that a lot of transfers were completed from current and saving accounts to brokerage accounts. The turnover is expected to remain high for at least 9-12 months as pulling such liquidity will take time even in case of a negative news flow. Despite lower earnings expectations from major companies (especially petrochemicals), the stock market is buoyant on the back of lifting of major concerns like Arab spring, strong oil prices, bullish news flow from Europe and the US, and increased liquidity. The report said solid volumes make the rally credible. It expects the trading volumes to increase further over the near-term coupled with high volatility, especially in stocks with low absolute price and small cap stocks. Further, liquidity will eventually move to large cap stocks when small caps become extremely inflated. Speculation remains the key market driver and hence, fundamental analysis will be less important over the next few months. Nevertheless, the Saudi market still remains relatively undervalued as compared to some major markets globally, despite a strong domestic economy. The report further said that banking, petrochemical, and telecom sectors have a healthy upside from the current levels. "This rally is likely to continue over the near-term on the back of high liquidity as well as relatively low valuations, assuming no major negative geopolitical or economic news flow," Al Rajhi Capital said in the report. Valuations still remain attractive. Despite the current rally in the stock markets, TASI's valuations remain attractive as compared to other GCC markets as well as major emerging markets globally. TASI currently trades at 12.8x 2012E, at a marginal premium to major markets across the region such as Qatar (10.5x) and Dubai (10.8x). Other global markets such as India (15.2x) and the US (13.1x) are trading at a significant premium to TASI despite lower domestic growth forecasts in those countries. The sector P/Es for the major sectors such as petrochemicals, telecom and food & agriculture remain lower as compared to global peers. Based on our discussions with many analysts and investors, banking remains the most attractive sector in Saudi Arabia (especially for foreign investors) despite valuation premium on a forward P/E basis as compared to other regions. __
