JEDDAH — TASI gained 3.2% in Dec-2017 on the back of an expansionary budget and 4% rise in WTI crude prices. The government has increased the 2018 budgeted expenditure by 5.6% to SR978bn (vs. actual 2017 spending), which will further increase to SR1,110bn if the PIF and NDF (National Development Funds) spending is included, according to a Al Rajhi Capital report Monday.
The report said, the key themes for 2018 will be: (a) Increased fiscal spending, (b) adapting to VAT, and electricity, fuel price hikes, and (c) watching for developments on TASI’s FTSE & MSCI inclusions. Oil prices shifting to a higher range and start of new non-oil revenue streams (VAT, expat levy etc.) will enable government to continue increasing fiscal spending over the medium term.
This is positive for cyclical sectors such as Cement (best performing sector in Dec 2017), Real Estate, Cap goods, Construction, Building materials and Banks. Secondly, VAT and electricity, fuel price hikes kick in from Jan 2018, which is broadly negative for consumption sectors in the near term, even assuming benefits from citizen account program.
Such expectations resulted in food & retail stocks underperforming TASI in 2H 2017. However, in the short term, the negative impact on consumption will be cushioned by the recent royal decree announcing new allowances and tax breaks to offset the higher cost of living. The report said, the investors are likely to remain on the side lines until the consumption and spending patterns emerge in the next few months. The report said, the firm would also keep an eye on gaining insights from new developments that will take effect in 2018 i.e. lifting of women’s driving ban and licensing movie theaters, and how these developments play into th
overall consumption dynamics in the Kingdom.
Overall, the report said that apart from top-down macro view and broad themes that it outlined, investors will also do well to focus on bottom-up stories in 2018, even from consumer sectors as some of these companies have built strong franchises and are likely to emerge much stronger having adapted to the current reforms.
Saudi Individuals’ recoup market ownership losses
Saudi Individuals’ ownership declined 71bps to 26.7% in Nov-2017, the largest monthly drop in 2017 and the second largest in the last 2 years. However, the market ownership losses were completely recouped in Dec 2017, gaining 69bps, on the back of IPI and HNWI buying.
New allowances, tax breaks to mitigate impact on consumption
The royal decree reinstating annual pay rise and SR1,000/ month allowance (for one year) for civil servants, and absorption of VAT on welfare sectors i.e. education, healthcare and to an extent on housing, will partially mitigate the negative impact on consumption from VAT, electricity/ gasoline price hikes in the short term.
Key takeaways from market positioning
Investor positioning in Dec. 2017 was majorly guided by Budget 2018, expected changes to electricity & fuel prices, and VAT implementation. The higher capital spending as announced by government in Budget 2018, combined with capital spending plans of PIF and NDFs, led to a significant rally in Cement sector stocks.
Sectors that are geared towards consumption i.e. Retailing, Food & Beverages, Food and Staples Retail and Healthcare declined in Dec 2017 on the back of expected hit to disposable incomes arising from VAT implementation and electricity, fuel price hikes, all effective from Jan 2018.
Dec 2017: Expansionary budget and oil price rise buoys the market with TASI gaining 3.2% in December 2017 on the back of an expansionary budget and 4% rise in WTI crude prices. The oil prices consolidated the price gains of previous few months and settled at approx. $60/ bbl at the end of the year.
In-line with the firm’s and market expectations, the government increased the budgeted expenditure for 2018 by 5.6% (vs. actual 2017 spending) to SR978bn. The expenditure will stand even higher at SAR1,110bn if the PIF and NDF (National Development Funds) spending are included. The market has responded positively to the government’s willingness to ease its purse strings in the medium term.
The increase in budgeted expenditure translates to increase in capital spending, such expectations resulted in beaten down cyclical sectors such as Cement and Cap Goods outperforming TASI in Dec 2017. However a slew of reforms i.e. VAT, electricity and gasoline price hikes, which are all effective from Jan 2018 have made the investors cautious towards consumption oriented sectors, which witnessed price correction in Dec 2017.
What should investors expect in 2018
As the report mentioned in its budget note, there are two key trends that are playing out:
1. Disposable incomes coming under increased stress in the short term, due to the many reforms taking effect i.e. VAT, expat levy, selective taxes and fee hikes, electricity price hikes likely followed by energy/ water price hikes, and
2. Higher fiscal spending going forward.
In this environment, we believe that investors should stick to secular and scalable consumer stories (mainly due to their long term potential), but will do well to pay attention to the sectors that are sensitive to increase in capital spending. According to the official budget document, the capital expenditure ratio to total government expenditure is projected to increase from 19% in 2017 to 22% in 2020. While total government expenditure growth is expected to average 4.3% for the period 2018-2020, the growth of capital expenditure over the medium term is expected to average at a higher 8.3%.
Hence, sectors such as corporate banks, cement, real estate, construction and building materials should witness higher investor interest in our view. We also believe higher government spending will likely translate to receivables hangover easing for the healthcare and building/ construction companies.
TASI traded value declining
trend continues for 2017
For 2017, TASI traded value declined 28% y-o-y, after recording 23% y-o-y decline in 2015 and 30% y-o-y decline in 2016. From the peak of SR2.15 trillion traded value in 2014, the TASI traded value of SR0.84 trillion in 2017 represents a 60% decline.
TASI traded value in 2017 was a tale of two halves. In 1H 2017, the TASI traded value was down 37% y-o-y, however, in 2H 2017 it was down by just 15%. In first four months of 2H 2017 i.e. July-October 2017, the TASI traded value was actually up 1% y-o-y, mainly due to no major selling by HNWIs and IPIs (part of Saudi Individuals), and Ramadan holidays shifting to Q2 this year. However, even though the TASI traded value increased in Nov-Dec 2017 compared to July-October period, it declined by 30% y-o-y, mainly due to the heavy traded value witnessed in 2016 during these months, led by private funds buying.
Saudi Individuals’ ownership
recoups Nov 2017 losses
Saudi Individuals’ ownership dropped 71 bps in November 2017 to 26.7%. This is the largest monthly drop in 2017 and the second largest drop in past 2 years. The SR10.1bn net selling by Saudi Individuals was mostly absorbed by Saudi Institutions, mainly Saudi MFs. Dec 2017 witnessed a complete reversal, with all the Nov 2017 ownership losses being recouped. Saudi Individuals’ ownership increased 69bps in Dec 2017, negating 71bps decline of Nov 2017. The majority 0f the gain was driven by IPIs, who gained 45bps ownership followed by HNWIs, with 13bps ownership gain.
Investor positioning in Dec 2017 was majorly guided by budget 2018, expected changes to electricity & fuel prices, and VAT implementation. The higher capital spending as announced by government in budget 2018, combined with capital spending plans of PIF and NDFs, led to a significant rally in Cement sector stocks, which was the best performing sector in Dec 2017.
The materials sectors (petchem + cement) was up 3% in Dec 2017, majorly driven by some large-cap cement stocks gaining 20%+ such as Saudi Cement, and Yanbu cement.
The utilities sector declined 12% in Dec 2017, the most among all sectors, as SEC announced that it would not be a beneficiary of the announced hike in electricity tariffs. The sectors geared towards consumption, i.e. Retailing, Food & Beverages, Food and Staples Retail and Healthcare, declined in Dec 2017 on the back of expected hit to disposable incomes arising from VAT implementation and electricity, fuel price hikes, all effective from Jan 2018.
Overall, the investors remain watchful of the effects of the above mentioned reforms and the sustenance of oil price level above $60/bbl.
Sectors with high investor interest (both price increase and traded value) were materials, real estate, telecom, and cap goods. As mentioned above, cement stocks drove the gains in Materials sector. Among larger names in Real estate, Dar Al Arkan continues its upward march, gaining a significant 51% in Dec 2017, rounding off a 5 months’ of consecutive
monthly price gains.
Sectors with low interest (decline in both price and traded value) were all related to consumption. They include Retailing, Food & Beverages, Food and Staples and Healthcare.