Saudi Arabia’s benchmark index is holding steady at 15-year highs, despite breaking a 10-day winning streak on Sunday.

The Tadawul All Share Index fell 1.23% on Sunday and was down 0.76% on Monday to trade at 12,047.04 Saudi riyals by midday London time, but is still up around 7% since the start of the year.

“Sentiment in Saudi Arabia is bullish due to brisk economic activity, sequential gains in corporate profits, lucrative IPO activity, a strong real estate market, and very high oil prices,” said Tarek Fadlallah, chief executive officer of Nomura Asset Management, Middle East.

The kingdom is the world’s second-largest producer of oil and its oil giant Aramco reported a net income of $30.4 billion for the third quarter of 2021 as the global economy reopened and energy prices soared.

“While the Saudi economy is in the process of diversification, the importance of oil, which account for around three-quarters of exports, cannot be understated,” Fadlallah told CNBC.

Mazen al-Sudairi, head of research at financial services company Al Rajhi Capital, echoed that view, calling oil the “main driver” of Saudi Arabia’s stock market. He said key sectors in the kingdom rely on oil both directly and indirectly.

Oil prices have risen more than 60% in the last 12 months as demand has rebounded, and hit a seven-year high last week after an attack on Abu Dhabi claimed by Yemen’s Houthi militants.

“The current backdrop remains supportive for share price performance,” said Ehsan Khoman, head of emerging markets research EMEA at MUFG Bank.

Specifically, petrochemical companies with the advantage of low costs and high operating efficiencies could gain considerably, he added.
Tailwinds for markets

Market watchers also said the Saudi market is likely to benefit from rising interest rates, with the profitability of banks, one of the market’s key sectors, set to improve.

“Higher oil prices and higher rates are positive for [Gulf Cooperation Council] banks through higher credit growth, strengthening liquidity and improved asset quality as well as cost of funding,” said Khoman.

He also said consumer retail firms in the Gulf stand to benefit because consumer confidence is highly correlated with oil prices, which will act as a catalyst for discretionary spending.

Additionally, many investors are underweight Saudi stocks, and some could choose to buy more aggressively, driving the stock market higher, Nomura’s Fadlallah said.

However, he doesn’t expect the Tadawul All Shares Index to hit new records in the near future.

“Although the TASI has broken up above its 15-year trading range, the all-time highs … are a long way away and unlikely to be challenged anytime soon,” he said.

The index hit 20,624.84 in February 2006, according to data from Refinitiv.
IPO ‘bonanza’

Separately, the competition for initial public offerings in the Middle East is “one healthy thing” happening in the region’s markets, said Fadi Arbid, chief investment officer at Amwal Capital Partners.

“There is a bit of a bonanza, but it’s a healthy one because some of these markets have been thin,” he told CNBC’s “Capital Connection” last week.

He said Saudi Arabia has an advantage over other states given its higher market capitalizations, average trade volumes and the number of IPOs, but “others are also catching up,” he said.