All economies have seasonal trends, but for Saudi Arabia these trends are more pronounced than for most other global economies. Seasonality has a significant impact on listed company performance and, although not obvious from recent data, anecdotally there is a clear effect on economic activity. The slowdown in activity in the third quarter due to the long hot summer is a key driver of seasonality. Although the effect on company earnings can be large, the seasonal distortions appear to be factored into share prices, according to a report by Jadwa Investment.
"We have examined quarterly earnings from 2004 for each of the 15 sectors of the market to determine seasonal trends. Our assumption is that under normal circumstances earnings would grow, so we have placed most emphasis on the times when quarterly earnings have fallen. For the market as a whole, earnings have fallen 11 times in the past 32 quarters. Seven of these 11 occasions have occurred in the fourth quarter," Jadwa said in its report released yesterday.
Although Eid al-Adha has fallen in the fourth quarter in recent years, the decline is primarily because companies choose to clean up their balance sheets in order to start the new year on a sounder footing. This is particularly the case with banks, with provisioning for non-performing loans usually peaking in the fourth quarter. Other firms also tend to write-off bad debts or investments in the final quarter.
Seasonal factors are also prevalent in the third quarter. Activity slows in summer in the Kingdom. Hot weather inhibits physical activity and encourages many residents to take vacations. In recent years, the summer slowdown has been exacerbated by Ramadan and Eid Al-Fitr.
The impact of the summer is greatest for those companies that rely on outdoor labor, or that provide inputs to these companies. For example, earnings of cement companies have fallen in quarter-on- quarter terms in the third quarter in six of the past eight years. Very hot weather causes cement to set quickly, restricting its use, and limits the hours construction workers can work outside. Earnings by industrial investment and, to a lesser extent, building and construction companies, also decline in the third quarter due to reduced outdoor work.
Summer has the opposite impact on the energy sector. This sector is dominated by the Saudi Electricity Company (SEC), whose profits are heavily influenced by use of air conditioning. SEC tends to make losses in the fourth and first quarters, move into profitability in the second quarter and record its highest profits for the year in the third quarter, when the temperature, and therefore the use of air conditioning, is at its peak.
In recent years Ramadan and Eid Al-Fitr have fallen in the third quarter. The generally shorter working hours and long holidays aggravates the impact of summer on sectors that are heavily reliant on labor. However, Ramadan is also a period of high consumer spending and as a result the retail sector tends to record its highest profits for the year in the third quarter. Several retailers are also specifically assisted this quarter by the outlays required ahead of the new school year.
Owing to a push from companies to conclude deals and projects ahead of the summer slowdown, the second quarter is generally the peak time for private sector activity in the Kingdom. Earnings in eight of the 15 sectors peaked in the second quarter. It is the quarter in which most projects are awarded and the prime season for conference and exhibitions.
Some sectors are unaffected by seasonality, such as petrochemicals, the market's largest sector. Petrochemical plants can run with little human input and regardless of temperature; their earnings are driven by conditions in export markets. Looking at data over the past eight years shows that seasonality, or lack of, is not reflected in share price movements across any sector. We assume this is because the seasonal trends are understood by investors and incorporated in share prices.
While not directly related to seasonality, there is a trend for prices of those sectors that pay healthy dividends, such as energy, to rise in the fourth quarter, as investors buy ahead of dividend distributions, and then fall in the second quarter once these payments have been made, the Jadwa report said.
