The Saudi market is likely to be significantly impacted by the decisions of global central banks regarding interest rates, analysts surveyed by Argaam said.
They pointed out that Tadawul All-Share Index (TASI) 12,320 points after the Eid al-Fitr holiday.
The Saudi benchmark reached its peak during the month of Ramadan at the level of 12,883 points on March 24, when it closed lower. The market then declined for five consecutive sessions, during which it lost more than 430 points, reaching the 12,401 point-level. TASI then rebounded in the last week of trading before the Eid al-Fitr holiday, recouping around 300 points to hit 12,705 points.
Key drivers during Ramadan
Saad Al Thagafan, economic analyst and a member of the Saudi Economic Association (SEA), stated that the Saudi market experienced mixed sector performance during the month of Ramadan, with some sectors shining.
Al Thagafan attributed the rise of the Saudi index to its peak at 12,800 points during the last two weeks of Ramadan to three main factors; the recovery of global markets, the rise in oil prices, and the performance of the banking sector.
He explained that global financial markets, especially in the US and Europe, hit record highs driven by expectations for interest rate cuts three times this year.
Additionally, oil prices experienced a significant increase recently, backed by supply constraints and positive demand forecasts, especially with the resurgence of Chinese industrial activity.
He added that due to the weight of the banking sector in the index, the increases in its constituents were supported by the historical annual results and expectations for profit growth, especially with better demand for credit and forecasts for interest rate cuts.
He added that some sectors, such as media and entertainment, was weighed down by stock rallies and the subsequent profit-taking, as the financial results posted by its constituents were below expectations. The pharmaceutical sector witnessed the same case.
He also pointed out that among the factors affecting the performance of the index during Ramadan, is the desire of some investors to take a break during the holy month, as liquidity decreases, especially at the end of Ramadan.
Small caps listed in the market witnessed significant growth in the recent short period, outperforming TASI, according to Al Thagafan. This was driven by the positive results and outlook for those companies, and the decrease in the market value of those companies, which helps to drive their prices higher.
For his part, Saad Al Saad, a technical analyst, explained that the Saudi market, like other capital markets, is impacted by both positive and negative news, with one of the most prominent being the announcement by the US Federal Reserve of holding interest rates steady, with expectations of a rate cut in 2024.
Al Saad explained to Argaam that raising and lowering interest rates have a strong prolonged impact on financial markets due to their economic impact, unlike other geopolitical news whose impact may be temporary, after which markets normalize.
The Market Rebound
Al Thagafan emphasized the key role of the banking sector in the resilience and surge of the index, after profit-taking led to a drop of more than 400 points.
He added that the materials sector witnessed a significant rise during the last week, driven by the higher prices of petrochemical companies, its main constituent, which witnessed a significant rally on attractive prices.
Al Saad also sees that as the Saudi market approached the technical and target levels of 13,000, momentum began to weaken, and liquidity decreased as traders feared the strong rebound experienced by many companies, as some companies saw rallies of over 50%, or 100% and more.
He also said that some statements indicated that the Fed may not reduce interest rates in 2024, which may have caused investors interested in investment to benefit from the expected cuts to lose their appetite as the expected stimulus may not occur.
Furthermore, at the end of Ramadan, the petrochemical sector moved, led by SABIC. Most petrochemical companies also rose, which marks a bounce because the market began to decline and petrochemical companies were in technical bottoms and cannot bear further decline. This gave an opportunity to traders after most companies in other sectors achieved their technical objectives, Al Saad elaborated.
Speculations and Higher Trading Volumes
The Saudi market, like other financial markets, responded similarly when inflation rises and the Fed begins to raise interest rates, experiencing a downturn as all sectors were affected. Conversely, when the Fed started to keep policy rates unchanged and promised of rate cuts, the market rebounded again, and trading volumes and liquidity increase significantly. In some trading sessions, the Saudi market recorded liquidity of more than SAR 11 billion and SAR 12 billion, a level that has not been seen for a long time.
This indicates traders’ desire to capitalize on this momentum and the return of confidence in the market to a greater extent than before. Hence, not only all sectors rose, but all financial markets, except for the petrochemical sector, which is linked to the materials sector that did not respond to the market’s strong rallies like peers.
The reason for this is the weak global demand for petrochemical products, as evident from the quarterly and annual results of petrochemical companies.
Regarding trading volumes in the market, Al Thagafan considers that part of the liquidity is speculative, with traders aiming to profit from transitioning from one sector to another to achieve capital gains. The other part is investment liquidity, especially with positive expectations for the growth of the Saudi economy, which is reflected on corporate profits and stock prices.
Market performance expectations after Eid al-Fitr:
Al Thagafan expects that the trajectory of the Saudi market after the Eid al-Fitr holiday will be significantly affected by the decisions of global central banks regarding interest rates.
From a technical perspective, Al Saad believes that after the Saudi market closed on April 4, it achieved its technical rebound target. TASI is expected to decline to levels where opportunities will renew, especially for companies that did not respond to the recent bounce.
He pointed out that the price targets for TASI after the Eid al-Fitr holiday will be 12,320 points, completing the negative pattern for the market. Then it is expected to move between 11,933 and 11,800 points, which is associated with breaking and closing below the 12,320 points level.
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