The Saudi stock benchmark Tadawul All Share Index (TASI) will end 2012 at 8,050 points, 7 percent above the current level, Jadwa Investment said in its report on the Saudi stock market. Based on its sectoral earnings forecasts and expectations for the trailing price-to-earnings ratio at the end of the year, Jadwa said share prices can "trade some way from fair value for some time." At the moment, bullish investor sentiment point to the index ending the year well above this level. The Saudi stock market has had a strong start to the year. The TASI has hit a three-and-a-half year high and volumes have surged. This reflects a clear and abrupt revival in investor confidence driven by a combination of local, regional and global factors. "We expect further gains in the TASI during the year," it said. However, "we are cautious about prospects for the rest of the year and do not think that the pace of recent growth can be maintained," particularly since the surge in volumes and very high proportion of trading are focused on a few small sectors and stocks. If money moves into larger stocks and is more evenly distributed it would give greater confidence that the rally can be sustained, the report said. Listed company earnings are forecast to grow by 14 percent in 2012. The industrial investment sector will record the fastest earnings growth owing to the first full year of production from Ma'aden's massive phosphate facility. Rising stock markets and the strong local economy will also cause a notable rise in earnings for multi- investment companies. However, in both cases, most of the gains are already captured in share prices, the report said. The largest sectors of the market, petrochemicals and banks, offer the best value. Most of the gains so far this year have been led by smaller sectors, with speculative investors pushing valuations to well beyond those justified by the fundamentals. The rises in banks and petrochemicals have been much smaller and their valuations are much healthier. Banks provide the best exposure to the vigor of the economy and the petrochemical companies are among the strongest in the world. In addition, both sectors would benefit from the rotation of investor inflows into larger companies and both would be sought after by foreign investors should the market open further. With the strong domestic economic fundamentals unlikely to be derailed, the major risks to outlook are external. The biggest source of uncertainty is the tensions surrounding Iran, while the accompanying rise in oil prices is threatening a global economy that has still to regain health. Other risks stem from the problems in Eurozone and continued political support for ongoing austerity in the EU and US. Global markets could also be undermined by a deterioration of economic data and a lack of new liquidity injections from central banks. The high volume of speculation will not protect the TASI from external shocks. It will add to volatility and will probably worsen the impact of any shock. The report also noted that over the past couple of years company earnings and their share prices have been disconnected. Earnings have been strong, with net income rising by 36 percent in 2010 and by 21 percent in 2011, but the TASI was up by only 8 percent in 2010 and fell by 3 percent last year. As a result, the price-to- earnings ratio of the market was below 12 for much of the final quarter of last year, a level previously only seen at the depths of the financial crisis in late 2008 and early 2009.
