RIYADH: News over last few days has created the impression that the world is out of the woods, the financial crisis is over and that the combined action of governments at the global level has finally triggered a recovery. Is it true?
Stock markets in BRIC countries have rallied significantly and NASDAQ is also up for the year. After the losses of $18.7 billion in 2008, Citibank bounced back with a profit of $1.6 billion in the first quarter, registering its best performance since Q2, 2007. Another noteworthy beating of analyst expectations came from General Electric, the US conglomerate.
Inflation has fallen substantially providing more room for further interest rate cuts in emerging economies like India and China that have become the growth engines of the world. Globally, operational costs of companies are falling and managements are cautious which would translate into lower debt, cleaner balance sheets and avoidance of undue risk taking for aggressive growth. Credit conditions are still tight but going forward they can only improve.
At home, the largest listed company in the Middle East, SABIC (Saudi Basic Industries Corp.), reported a loss of SR974 million in the Q1, 2009 as compared to net profit of SR6.9 billion over Q1, 2008. The net income before the non-cash charge related to impairment of goodwill was SR207 million. The losses were the result of year on year decline in petrochemical and steel product prices along with reduced credit availability to its customers. The global exposure of SABIC weighed on its performance. The momentum of low product prices will continue to impact the margins at least for the next few quarters. The vagaries of the global slowdown will not disappear so soon. If anything, big players in the global petrochemical industry will further intensify the fight for survival. Investors will do well to focus on local and regional players from the industry.
Al-Rajhi Bank has announced stellar profits with a growth of 22 percent from previous quarter and 8 percent growth year on year. Overall performance in the Kingdom’s banking sector is highly encouraging. All banks are in profits and, barring Riyad Bank and Saudi Hollandi Bank, all of them have clocked growth in net profit over the previous quarter. Banking is the pipeline that pumps money in the economy. The good performance of this sector is an indicator of good economic health.
There are other encouraging signs.
• Oil prices have rebounded from the lows.
• Projects on hold will move once the credit bottleneck is cleared and there is better clarity on demand/supply. The later has started to happen.
• Deep pocket investors are willing to wait for a couple of quarters for economic recovery but fear it will be too late to enter equities then.
• Local companies are likely to emerge out of global crisis faster.
• Volatility has halved in first quarter as compared to the last quarter of 2008.
• Floating stock is declining, confirming the return of big investors.
• Cash rich companies are emboldened by the clearer picture of economic crisis and its impact. This will limit the downside in share prices as they will step in to acquire attractively valued stocks.
Further, the volumes have gone up substantially over the last few days. This indicates buyers are countering sellers. The return of buyers has also arrested the volatility. Despite the confidence shaking results from SABIC, the Tadawul All-Share Index (TASI) has taken the bear onslaught well, recovering from intra-day lows and has gained since then. Investors are not as shaky with selling pressure as they were before. Big market participants are accumulating quantities at these levels for decent returns in future.
Does it mean that the market is entirely out of the woods? No.
The risk of decline remains. Since the beginning of the crisis, local markets have followed global developments. There has been overlapping of investment sentiments because of tremendous cross-border transactions. But having said that, local conditions are noticeably different from global conditions.
The domestic financial system has managed to stay, by and large, immune to the caustic effects of US mortgage disaster. Infrastructure is coming up in a big way while economic cities are boosting private participation.
Also, the Capital Market Authority (CMA) is actively encouraging competition among investment bankers, raising transparency in market transactions, disseminating stock sensitive information to all without delay, blocking unfair plays and inviting foreign participation in listed equities.
The realization of the bottoming out of the market in downtrend or topping out in uptrend comes only when one looks in the rear view mirror.
Global economic recovery will be slow and positive results of Citibank may not indicate its sustainable profitability but the Saudi stock market looks poised for good returns. These are early days. It is good to see the bulls returning to the domestic market.
(Snehdeep Fulzele is head of research at FALCOM Financial Services, Saudi Arabia. Views expressed herein are his and his employer may or may not agree with them.)
