Strategy Note /
Saudi Arabia

2022 Saudi Equity Strategy – Steering Through Volatility

  • We believe the outlook is muted for EM due to strong US$, regulatory changes and slower economic growth in key economies

  • We believe TASI will trade between 10,600 to 12,400 points in 2022f, reflecting a dividend yield of 2.5-3.0%

  • We prefer the Banking and Construction sectors, along with an exposure to REITs as an inflation hedge

2022 Saudi Equity Strategy – Steering Through Volatility
Iyad Khalid Ghulam
Iyad Khalid Ghulam

Head of Equity Research

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SNB Capital
2 January 2022
Published bySNB Capital

Executive Summary

Motivated by unprecedented earnings growth, exceptional performance and positive sentiment in 2021, the Saudi market enters a multifaceted year with higher than usual volatility being the main theme. Strong economic growth and the first potential surplus in 9 years are expected to be challenged by COVID-19 variants and global inflationary pressures

Once again, global equities are starting the new year with record levels and stretched valuations. However, rising inflation and tightening monetary policies may exert pressure on global equity markets

We believe the outlook is muted for EM due to strong US$, regulatory changes and slower economic growth in key economies. Nevertheless, we believe these factors will elevate the importance of the SAR/US$ peg, positioning Saudi as the market of choice within the EM universe. Therefore, we expect TASI to maintain (and possibly extend) its EM valuation premium of c59%

Moreover, the Saudi economy is expected to record a remarkable growth of 7.2% in 2022f compared to 2.9% in 2021f, on strong growth in oil and non-oil GDP. The acceleration in implementing Vision 2030 VRPs will be the economy’s main driver, with a larger role to be played by national development funds. Sustainable oil prices, on improved global demand and low Capex, further supports the economic outlook.

After recording an extraordinary earnings growth of c130% yoy in 2021f, we expect Saudi market earnings to normalize, with a growth of 5-8% in 2022f. This compares to declines of 25% yoy and 19% yoy in 2020 and 2019, respectively. We expect the strong performance of the Banking sector to be offset by earnings normalization in the Petrochemicals sector

Based on our earnings expectation and fair P/E range, we believe TASI will trade between 10,600 to 12,400 points in 2022f, reflecting a dividend yield of 2.5-3.0%

We prefer the Banking and Construction sectors, along with exposure to REITs as an inflation hedge. We also recommend selected exposures in the F&B and Tourism sectors. The Petrochemicals sector is expected to face headwinds, after a historic year in 2021.

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