The TASI (Tadawul All-Share Index) continues to underperform global markets despite reasonable third quarter results and improving economic conditions. Annual earnings per share growth in the third quarter fell by 33.8 percent, the largest decline since the final quarter of last year. In quarter-on-quarter terms earnings growth also deteriorated, to -18.9 from 11.7 in the second quarter. This decline reflects seasonal factors, given that the third quarter includes the peak holiday season, very hot weather and Ramadan. Nonetheless, since the end of October the TASI has underperformed the US S&P 500 and the MSCI emerging markets index by around 5 percentage points, according to a report by the Riyadh-based Jadwa Investment. Only three sectors recorded year-on-year earnings per share growth: Insurance, utilities and retail. The large growth in the insurance sector reflects the expansion of operations and move into profitability of many of the new insurance companies that have been launched over the last few years. The utilities sector is dominated by the Saudi Electricity Company, which generally has a strong third quarter, as the summer is the peak time for energy consumption, notably by airconditioners. For retail the growth in part reflects a reduced burden from inflation, which was rapidly eroding consumers' disposable incomes in the third quarter of 2008, though the growth is concentrated in two companies; others recorded large declines in earnings.


Petrochemical was the worst performing sector, owing to the impact of the global recession on demand and prices. Ethylene prices were 30 percent lower in the third quarter of this year than in the third quarter of 2008, when they hit an all-time high. Profits at SABIC (Saudi Basic Industries Corp.) were down by 50 percent in year-on-year terms, though this was better than most analysts' expectations. With the prices of most petrochemical products well above their levels for the fourth quarter of last year, the sector is likely to be one of the fastest growing in the final quarter. The two smallest sectors on the TASI, hotels and resorts and media and publishing were the second and third worst performers in the third quarter, the Jadwa report said.

Earnings per share in the third quarter were 18.9 percent lower than in the second quarter. The worst performing sector was hotels and tourism. While this sector benefits from the seasonal trend, it was affected by one company booking large revenues from a one-time land sale in the second quarter. The sharp decline in earnings per share by cement companies is because this industry is more affected than most by seasonal conditions given that hot weather makes cement difficult to work with (as it sets very quickly) and affects the working hours for those operating outdoors. The best performing sectors on a quarterly basis were the same as those that reported the strongest year-on-year results.

The Jadwa report added initial market response to the third quarter results was favorable and the TASI maintained its upward momentum during the first three weeks of October (when the bulk of the results were announced). Subsequently the market has fallen back and has again failed to respond to an upward trend in global markets. According to Jadwa, the following factors are currently holding back the Saudi market:

--Tough credit environment: Concerns about the fallout from high profile financial difficulties at two local businesses remain. Banks increased provisioning for bad debts by SR1.7 billion in the third quarter and remain cautious about lending; credit to the private sector was up in September, but only by 0.5 percent.

--Corporate selling: We think that some companies have taken advantage of recent gains in the market to sell in order to raise funds. Corporations were large net buyers in October, with total purchases of SR4.17 billion versus total sales of SR2.36 billion, but we have questions over the comprehensiveness of this data. Furthermore, the available data show that some large shareholders are gradually reducing stakes in listed companies.

--Weak dollar: Low US interest rates and the prospect of currency gains are encouraging international investors to borrow in dollars to finance investments in higher yielding assets, including many emerging market stock markets, but the exchange rate peg and restrictions on foreign investment mean these flows are having little impact on the Saudi market. In addition, dollar weakness has reawakened concerns about inflation in the Kingdom.

--Tensions with Yemeni rebels: The TASI has moved sideways since an armed incursion into Saudi territory by Yemeni rebels in early-November. Although the tensions are not notably affecting the operations of listed companies or the economy in general, it seems likely that they have unsettled some investors.

A lack of confidence continues to hold back the Saudi market. At present, the market has a far greater response to falls than rises on global markets. Economic conditions are improving, but without greater investor confidence the market will struggle to make significant gains over the remainder of the year, the Jadwa report said.