Market analysis: Saudi Arabia in austerity drive amid volatility

Last month marked sharp volatility in Mena markets driven by regional and global events such as the unofficial Opec meeting in Algeria, Federal Reserve and Bank of Japan policy meetings, inclusion of Qatari stocks in the FTSE Emerging Markets index and additional austerity measures in Saudi Arabia.

In September, the UAE market (average of DFM and ADX) lost 1 per cent compared with declines of 8 per cent and 5 per cent in Saudi Arabia and Qatar respectively.

The price of oil, after much volatility, rose by 6 per cent last month with the informal meeting in Algeria the main driver. Opec surprised with the meeting going from “just consultative” in nature to the group finally agreeing to cap production at between 32.5 million and 33 million barrels per day.

The agreement, which pushed out the actual enforcement until November, indicated that Opec is willing to revert to its role of managing the oil markets and acting as a swing producer. Even as oil prices move towards $50 per barrel, uncertainty remains as to actual quotas, compliance levels, production leeway for some countries to potentially increase production, recovery in US oil production and the potential failure of the accord between now and the end of November.

Overall indications are that rather than targeting a continuing increases in oil prices, this agreement is aimed at establishing a floor.

The Saudi market was particularly weak as further austerity measures were announced by the government, the most important being the cut to salaries of government ministers and Shura council members and a reduction in bonuses for all government employees.

These austerity measures, together with concerns regarding the US senate’s override of the US presidential veto with regards to the 9/11 sovereign immunity bill in the US, more than offset the unexpected, but positive, Opec production cut/freeze agreement.

As the much-awaited Saudi bond issuance draws closer, the kingdom’s government may act further in the oil markets to provide additional stability to prevent risk of further economic contraction next year.

Banking stocks in Saudi Arabia failed to climb the wall of worry despite a cash infusion of 20 billion Saudi riyals by the Saudi Arabian Monetary Authority, the country’s central bank.

Our takeaway from an investor conference last month, where we met about 50 companies from the region, highlighted that corporates were cautious and faced a challenging environment.

Our positive position on the UAE was reinforced as executives appeared confident and highlighted the relatively diversified economic base, non-domestic drivers and stable fundamentals.

As we head into the results season in earnest, we expect an overall flattish set of third-quarter numbers in Saudi Arabia.

At the sectoral level, Saudi petchems are expected to report a decent set of numbers and banking results are expected to be stable, as provisioning is likely to be delayed with consumer loans also being restructured. Consumer discretionary is likely to be weak with select staples likely to do well.

In the UAE, we expect a good set of numbers from real estate developers following completion of projects, continuing the good show they have put on for the past three quarters.

In the case of UAE telecoms and banking sectors, we are expecting flattish profit growth. At this stage, top-down news flow will be of greater importance to the broader market than individual company results.

In summary, the overall environment remains challenging and further austerity measures may be announced in Saudi Arabia. However, the recent Opec agreement could act as floor for oil prices and in turn provide much-needed stability to Mena markets.

Saleem Khokhar is the head of fund management at National Bank of Abu Dhabi.

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