We expect 2020 to be a more positive year for the Saudi economy, with stronger growth driven by the non-oil sector as a result of progress on the Vision Realisation Programs (VRPs) and the domestic investment of the proceeds of the Saudi Aramco IPO. OPEC+ aiming to create equilibrium between oil supply and demand should ensure stability for government oil revenues in 2020. Nonetheless Saudi’s commitment to OPEC+ is expected to impact Saudi oil GDP. Upside could potentially come from further progress on the US/China trade negotiations, with a positive outcome boosting global GDP growth and hence oil demand.
We believe consumer sentiment is improving, supported by the overall trends of economic recovery. We expect higher consumer spending as a result of the extension of cost of living allowances and additional entertainment options. Moreover, lower interest rates are expected to support overall loan growth and overall earnings of banks. Execution of VRPs, progress on Mega Projects and Ministry of Housing initiatives should support the construction sector. We do not envisage any new taxes in 2020.
Saudi is now firmly on the radar of international investors following inclusion to benchmark indices and the Saudi Aramco IPO. QFI and swaps holdings have increased to 6.1% (as of November 2019) vs 1.0% before the inclusion of Saudi in EM Indices. We expect there would be further inflows from foreign institutions as FTSE Russell completes the final tranche of the upgrade in March 2020 and the free float of Saudi Aramco increases as the 180-day holding period for bonus shares for Saudi retail expires in mid-2020. With a reduction in interest rates and further monetary easing, investors are once again hunting for yield and Saudi offers a higher dividend yield than other Emerging markets, together with a stable currency.
TASI earnings are expected to grow by c4.7% yoy in 2020f vs a decline of -3.8% yoy in 2019. The earnings growth will be driven by the Banking, Telecom, Consumers and Healthcare sectors.
We assume a fair PE multiple of 17.3x-18.4x, in-line with TASI historical average of 17.8x. Although this implies TASI to trade at a premium to MSCI EM, we believe the premium is justified due to the currency peg and higher dividend yield than EM. Based on our earnings expectation and fair PE range, we believe the fair value of TASI is in the range of 8,400 to 8,900 points in 2020f.
We prefer companies that would benefit from the following themes: 1) Vision Realization Programs; 2) Mega Projects; 3) Consumer spending; 4) Low interest rates; and 5) Entertainment.
We prefer the Banking, Retail and Tourism sectors. We recommend selective exposure in Healthcare and Cement and remain cautious on the Petrochemical and Food sectors.