Morgan Stanley expects Saudi stocks to rise 14% during 2023‎

Morgan Stanley revealed its expectations for an increase in Saudi stocks, which represent 34% of the weight of the MSCI index, by 14% in the next twelve months (2023), mainly driven by profit growth, amid the continued rise in oil prices in support of economic reforms in the country.

However, Morgan Stanley expected earnings momentum to slow, particularly for banks that account for 50% of the index, as Fed and market meetings begin pricing cuts by the end of 2023 and headwinds to margins are driven by tight funding in the market.

“Morgan Stanley” expected an increase in profits by 7% during 2023 and also another 7% in 2024, mentioning that with regard to the price-to-earnings ratio, Saudi stocks are now trading at a profit multiple of 15.1 times, much lower than the peak levels that It was in late 2020, when it peaked at 22x for the year, likely to be 15.6x below the 4-year historical average level.

It added that the ratio of bank loans to deposit rates is approaching the regulatory peak, and banks are increasingly turning to more expensive wholesale financing markets, which has led to declining margins, adding that the gradual growth of corporate loans will only lead to moderate positive adjustments to earnings due to funding constraints. This and the resulting pressure on net interest margins. This means that even with economic reforms and an investment partner program leading to a sharp increase in corporate loan growth, the net profit outcome is likely to be moderate.

Also the bank indicated that the Saudi banks index represents 50% of MSCI Saudi Arabia, and therefore Saudi stocks are closely related to banks, adding that in the current high price environment, Saudi banks are looking for retail deposits to convert from interest-free deposits to which carries interest, which increases pressure on profit margins.

According to a survey conducted by “Morgan Stanley” and included 1,000 customers of Saudi banks, 52% of respondents are “very likely” to open a profit / interest account in the next six months. On the other hand, “Morgan Stanley” expected an increase in North African stocks by 13%, Middle East stocks, excluding Saudi stocks, by 11%, and European stocks by 16%.