(Bloomberg) — Saudi Arabia's stock market is reeling after a summer rally, with the Riyadh stock exchange suffering its worst start to the fourth quarter in years amid rising regional tensions.
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The Tadawul All-Share Index fell 2.2% in the first three trading days of October as Israel stepped up its offensive against Iran-backed Hezbollah and considered retaliation for Tehran's missile attacks. The index spent months dodging smoldering tensions and a slump in oil prices, but the recent decline wiped out all of its year-to-date gains.
The question is whether the market can withstand further escalation of the conflict and oil prices well below the levels needed to finance Saudi economic diversification. For many investors, the answer is no, at least in the short term.
“Investors are generally scared of wars and geopolitical conflicts,” said Ryan Remand, CEO of NeoVision Wealth Management. Stock markets in countries in close proximity to escalating wars “could be drained.”
Jassim Aljubran, head of sell-side research at Al Jazira Capital, said the market should remain under pressure in the short term. He expects the Tadawul index to fall to 11,380 points (about 5% from the closing price), but said it could rise by the same amount if the regional situation improves.
“There are growing concerns about the possibility of direct military conflict between regional parties,” he said. “Saudi Arabia aims to remain neutral, but an escalation near the critical Strait of Hormuz could trigger a global crisis due to its importance in the global oil supply chain.”
Oil prices will continue to be an essential factor in the market. Although Saudi Arabia is spending heavily to achieve the goals of Crown Prince Mohammed bin Salman's Vision 2030, which aims to diversify its economy, it remains dependent on energy revenues and is suffering from low oil prices. This is contributing to the need to readjust investment plans, Bloomberg reported.
Strategists at HSBC Holdings downgraded Saudi stocks from overweight to neutral, citing heightened geopolitical risks and near-term risks from falling oil prices.
Brent crude oil futures have risen on concerns about oil supply disruptions, but remain below $80 a barrel. That's far short of the $96 level the kingdom needs to break even, according to the International Monetary Fund. Bloomberg Intelligence estimates the so-called break-even point, after accounting for spending by Saudi Arabia's sovereign wealth fund known as PIF, at $112.
Still, Abdulwahab Abed, acting chief executive of $8.5 billion asset management firm Sedco Capital, said oil prices would remain below $69 a barrel for some time to pose a significant risk to the Saudi stock market. say there is a need.
And some investors, such as Mohammed Al Suweid, chief executive officer of Rajeen Capital, see the selloff as an opportunity. “Regional tensions always put temporary pressure on the market and give us deep discounts,” Al Suweid said.
–With assistance from Tugce Ozsoy.
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