Small-cap stocks surge supports Saudi market’s ‘good’ performance: EFG-Hermes

Hatem Alaa, Deputy Head of Research at EFG Hermes 

The Saudi market delivered “good” performance during the current year, propelled by the small-cap stocks, Hatem Alaa, Deputy Head of Research at EFG Hermes told Argaam.  

This came after investors moved away from the banking and petrochemical sectors at the beginning of the year towards stocks in the insurance, healthcare and consumer sectors, Alaa said on the sidelines of the EFG Hermes Saudi Forum in London. 

Post-Q2 2023 results, investors shunned the sectors of the small-cap stocks due to their stellar performance during the year. Conversely, they embraced the larger sectors, such as banking, especially as large-cap stocks reached attractive levels, Alaa noted.  

The performance of the healthcare companies, especially the smaller ones, is improving after the end of COVID-19, Alaa said, adding that the growth opportunities in the sector are high due to the increasing population in the Kingdom and the volume of insured patients (over 11% in 2023) positively supporting these companies. 

Some companies tend to cooperate with the Ministry of Health, backed by the government’s quick payment system, he stated. In addition, several hospitals in Saudi Arabia have expansion and acquisition plans, which will enhance the healthcare sector. 

The consumer sector is recovering, although last year witnessed many changes due to higher inflation levels and unprecedented price increases, Alaa noted, pointing out that the healthcare providers witnessed lower prices, lower inflation levels and improved volumes in 2023.  

Retailers, including Jarir Marketing Co., Saudi Company for Hardware (SACO) and United Electronics Co. (eXtra), may see some slowdown in activities due to delays in large invoice sales to some consumers, compared to other retailers. Additionally, the gradual decline in interest rates will contribute to the improved performance of these companies.

The petrochemical sector delivered an outstanding performance last year. However, oil volatility and price spreads pressured short-term financial results.

Oil prices are forecast to stabilize but companies will report low profitability, which does not reflect real profitability in the medium term, Alaa said.

EFG-Hermes favors more corporate-focused banks than retail ones due to growth in corporate financing for projects in the Kingdom, as well as growth opportunities on interest rate hikes.

The banking sector has an attractive rating due to poor performance last year. There are good investment opportunities at the current prices, such as the Saudi National Bank.

The significant weight of the banking and petrochemical sectors has a remarkable impact on determining the market’s direction in the coming period, he stated.

Alaa expected the US Federal Reserve not to raise interest rates significantly and implement rate cuts by mid-2024.