RIYADH — It's been a disappointing year so far for the overall Saudi stock market, where the main index is up just 2.9 percent year-to-date, underperforming many Gulf and global markets. But that doesn't mean every Saudi stock is sluggish. Investors are piling into selected medium-capital stocks in sectors exposed to Saudi Arabia's consumer boom, earning returns that compare with bull markets elsewhere in the region. “Consumer spending is still the dominant theme in Saudi, driven by macro factors and solid fundamentals,” said Sleiman Aboulhosn, Dubai-based investment analyst at ING Investment Management. “Expectations are for more real growth in the food, retail and healthcare services industries this year.” Local retail investors who dominate trade in the Saudi stock market, accounting for about 70 percent of turnover, became accustomed to double-digit annual profit growth in the petrochemical and banking sectors over the last few years. Earnings for the fourth quarter of last year showed profit growth at many of those large-capital companies dropping into single digits, partly because of plateauing global petrochemical prices and bad loan provisions at banks. This disappointed investors, accounting for the main index's weak performance this year. But many of the investors have not withdrawn from the market entirely; they have merely shifted to smaller stocks. Thanks to high oil prices and heavy government spending, the Saudi economy grew 6.8 percent last year, and analysts expect growth to fall only moderately this year. So the retail sector seems a good bet to many investors. Top performers in the retail sector include fashion retailer Fawaz Abdulaziz Alhokair, whose shares are up 10.6 percent year-to-date, and electronics seller United Electronics Company, up 13.6 percent this year after a 35.6 percent jump last year. “Expansion through opening stores, margin support from economies of scale and consolidation of fragmented markets are key drivers of profit growth” for the retail sector, Farouk Miah, acting head of research at Jeddah's NCB Capital, said in a research note. His firm suggests an overweight investment stance on Alhokair and United Electronics, seeing upside potential of over 10 percent for both stocks. A key concern for the retail sector however is increased costs from the government's efforts to increase employment of Saudi nationals by setting quotas. Last November, the labor ministry said it would impose fees on companies that hired more foreign workers than Saudis. Since foreign workers are generally cheaper than Saudis, and retail outlets are heavily dependent on foreign staff, the policy could have a significant impact in curbing earnings growth, although the precise effect is not yet known. So investors are also looking at other sectors exposed to rising domestic demand. Mouwasat Medical Services, which operates hospitals and pharmacies, is one target; its shares are up 12.6 percent so far this year. Another favored sector is tourism and travel, where growth may accelerate after the government began last year to liberalize the domestic aviation sector, allowing new entrants. Al Tayyar Travel Group has risen 33 percent since its listing in June, while Saudi Airlines Catering, a unit of national carrier Saudi Arabian Airlines, has gained 39 percent since its July debut. Initial public offers of shares in these firms were oversubscribed by several times. “Everyone is looking at Q1 results, which will be the main driver” of the market in coming months, said Hesham Tuffaha, a Riyadh-based fund manager. Corporate earnings for the first quarter of this year are expected to be released in April. “There is growth potential of above 20 percent in small and medium-cap stocks where the flow is going,” Tuffaha said. “Most of the bigger companies, banks and petrochemicals have muted growth outlooks.” — Reuters
