Saudi investors may have little to cheer from a market rebound, as the country’s stock exchange remains among the world’s worst performing markets so far this year.
After oil prices rallied last Friday, the Tadawul gained 2.7 per cent on Sunday and was flat on Monday – bringing its decline for 2016 to 18.8 per cent.
The immediate outlook, analysts say, remains bleak.
“It is going to continue for a few months or few weeks until the government announces how the private sector is going to participate in economic expansion,” said Mohammed Al Suwayed, the head of capital and money markets at Adeem Capital in Riyadh. “There is high ambiguity in the market right now.”
The government announced a 2016 budget that included a raft of reforms, including lower spending; unprecedented cuts in subsidies on electricity, water, gas and other energy products; and plans to privatise some assets over the next five years.
But it did not spell out how it planned to sell assets and encourage the private sector to make up for lower government spending, which is the main driver of growth.
Saudi Arabia plans to cut public spending this year to 840 billion Saudi riyals (Dh822.46bn), down from the 975bn riyals spent last year. With the economy so dependent on government spending, this reduction will slow economic growth further.
The IMF has lowered its economic growth forecast for the kingdom this year to 1.2 per cent, down from its October forecast of 2.2 per cent and the slowest pace of growth since 2002. Growth last year was 3.4 per cent.
The main reason for the dismal outlook is the plunge in oil prices on a global supply glut and weak demand. As the world’s largest oil exporter, Saudi Arabia relies on oil revenue for more than 70 per cent of government income.
“We have started to see some pressure across different sectors, which is a reflection of the more challenging backdrop – a drop in oil prices and tightening in government spending, which would result in a slowdown of the non-oil sector in Saudi Arabia,” said Rami Sidani, the head of frontier investments at the asset manager Schroders. “The removal of subsidies will put pressure on the earnings across different sectors, where the petrochemical sector will be on top of the list.”
Already, earnings of petrochemicals, oil-related companies and construction have been dismal.
Sabic, one of the world’s biggest petrochemical producers, reported a 29.4 per cent drop in fourth-quarter net profit because of lower sales prices. Sabic has said the removal of subsidies would push up total annual costs by 5 per cent before minority interest this year and the effect will start to be felt in the first quarter.
Petro Rabigh, a refining and petrochemical joint venture between Saudi Aramco and Japan’s Sumitomo Chemical, widened its losses in the fourth quarter amid a drop in prices of petrochemical and oil products. Petro Rabigh has said the financial effect from the scrapping of subsidies would be 300 million riyals this year.
The Saudi construction company Abdullah A M Al Khodari and Sons swung to a fourth-quarter net loss as revenue dropped and margins fell. The lifting of subsidies will increase costs of outstanding projects by 44.3m riyals between 2016 and 2020.
“Fourth-quarter earnings were bad, less than expected. Very few sectors reported growth,” said Iyad Ghulam, an equity analyst at NCB Capital in Riyadh. “In general, the lower earnings affected investor sentiment and the market. Going forward, the period will be challenging for companies because from the first quarter we will begin to see the effect of the removal of subsidies.”
dalsaadi@thenational.ae
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
Company%20Profile
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Living in...
This article is part of a guide on where to live in the UAE. Our reporters will profile some of the country’s most desirable districts, provide an estimate of rental prices and introduce you to some of the residents who call each area home.
SPECS
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Skewed figures
In the village of Mevagissey in southwest England the housing stock has doubled in the last century while the number of residents is half the historic high. The village's Neighbourhood Development Plan states that 26% of homes are holiday retreats. Prices are high, averaging around £300,000, £50,000 more than the Cornish average of £250,000. The local average wage is £15,458.
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IF YOU GO
The flights
FlyDubai flies direct from Dubai to Skopje in five hours from Dh1,314 return including taxes. Hourly buses from Skopje to Ohrid take three hours.
The tours
English-speaking guided tours of Ohrid town and the surrounding area are organised by Cultura 365; these cost €90 (Dh386) for a one-day trip including driver and guide and €100 a day (Dh429) for two people.
The hotels
Villa St Sofija in the old town of Ohrid, twin room from $54 (Dh198) a night.
St Naum Monastery, on the lake 30km south of Ohrid town, has updated its pilgrims' quarters into a modern 3-star hotel, with rooms overlooking the monastery courtyard and lake. Double room from $60 (Dh 220) a night.
How to protect yourself when air quality drops
Install an air filter in your home.
Close your windows and turn on the AC.
Shower or bath after being outside.
Wear a face mask.
Stay indoors when conditions are particularly poor.
If driving, turn your engine off when stationary.
NO OTHER LAND
Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
COMPANY%20PROFILE%20
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