Thematic Report - Aljazira Capital
Thematic Report
December 2014
TASI & Oil Prices Report: A View On Correlation
Please read Disclaimer on the back
Historically, studies show that stock market returns have a
flat till it collapsed mid 2008 along with oil prices. This event
negative correlation with commodity prices. The data shows
also supports our findings regarding upward and downward
that TASI’s correlation with oil prices is relatively high (on
movements.
a quarterly basis) compared to other markets and is more significant during oil price declines; giving an indication of a higher level of responsiveness during oil price drops.
Shortly after the post 2008 financial mess was the increase in oil prices from $80 to around $120 from 2010 till well over 2012. This increase in prices barely translated to an intense spike or
To put things into perspective, one of the highest levels of
rally in the market. The market barely nudged, it registered
correlation between a commodity and a stock market was
steady gains throughout the following years reiterating our
between crude oil prices and the S&P500 registered by the
finding of slower or gradual reaction to a surge in oil prices both
end of 2013 at a correlation level of 0.4, TASI and oil prices are
in the form of gradual gains and in price shocks.
currently hovering around 0.5. Data indicates that the main variable affecting the correlation coefficient of stock markets and oil prices is whether the country is a significant oil exporter or an oil importer. Oil exporting countries witnessed a peak in correlation levels between the years 2009 and 2013. We should clarify that the S&P 500 and TASI both show a relatively high correlation to oil prices. However, taking the data on a long term (above 10 years) and/or reducing the frequency of computation (quarterly basis) shows that TASI exhibits a higher level of correlation with oil prices than the S&P500. Examining the data over 10 years unveils periods of negative correlation between the two indices. One of the factors contributing to the less than expected correlation is the lagging effect of rising oil prices on TASI. Data shows that periods of rising oil prices are followed, rather slowly, by periods of bullish market sentiment that take a while to materialize into a market
The market seems to have reacted to better economic conditions reflected in increased government spending on development projects. Gradual gains followed the large increase in oil prices a few years ahead. TASI went on a bull run thereafter registering more than a 30% gain from mid-2012 to Aug 2014. The bull run took place in a relatively stable oil price environment. It is important to note that taking oil prices alone as a factor in market movement is rather an oversimplification of the Saudi equity market. Taking the recent bull run as an example, general world economic conditions, projected growth rates, and stimulus plans all had an effect. It is worth noting that 2012 witnessed an oil price dip from $115 levels to $90 per barrel. This large decline shook the market. TASI lost around 10% in two months. Again, this supports the finding stated earlier.
rally. However, the reverse effect is more severe. Meaning, when
The bottom line is that investors seem to react quicker and with
oil prices experience a downward shock the market reacts
a heavier hand to oil price dips than to upsurges. This sentiment
almost immediately, registering a higher downward correlation
is reflected into two main fears, first is the economic condition
relative to upward movements.
and future Economic expansion in the kingdom. Second is the
Further examination reveals that the market rally of 2005 and 2006 had nothing to do with oil prices, neither in the short nor the long term. Oil prices were relatively stable between $50
petrochemicals industry, fear of a bouncy ride for the large companies in the sector, the largest sector in the market . (around 30% of Saudi market profitability).
and $60 from mid-2005 till mid-2006. No price shocks were
It is also important to note that the correlation is not at all
registered at any point neither in the rally nor in the collapse.
meaningless; rather, it is unusual for a market to have such a
We also should note that oil prices rallied more than 15% during
correlation to a commodity’s price movement. The duration
the collapse.
and frequency at which the correlation is computed at makes
Another similar event is during the 2008 crash. Oil prices rallied to over $140 (more than 50% increases) while the market stayed
the largest difference in the outcome, which is an important point to consider when reading and interpreting correlation data. Sultan Al Kadi Analyst
1
+966 11 2256374 [email protected]
© All rights reserved
Thematic Report
December 2014
TASI & Oil Prices Report: A View On Correlation
Please read Disclaimer on the back
The current dip in price is accompanied by cloudy world
disappointing figures from Germany and slower than estimated
economic conditions. Lower oil prices are usually passed as a
growth in China all contribute to the case made by analysts
good indicator for oil importers, reflected almost instantly in
to support that scenario. Deflation is also a possible scenario
economic output and consumer spending. However, we have
contributing to the cloudy state of the markets.
yet to see if this dip in price would amount to the same result.
Worries of a further dip in price are plausible in the short run.
The current worry, according to The Economist, is whether the
Oil importers stock piling at current prices keeps demand at
current prices are a result of weakening global demand or a
current levels. Assuming production at current levels, weaker
surge in oil supply; possibly a combination of both. The first
demand along with an imminent reduction in stock piling
scenario seems to be the one with the largest backing. The
could be the next factor slowly pushing prices further down.
cut in worldwide growth projections by the IMF along with
Correlation (2004 – 2014) Quarterly Basis
Event
Correlation
WTI
Brent
2005 – 2006 Bull Run
TASI
0.540
0.544
2008 Financial Crisis 2
0.578
DJIA
0.412
0.356
2010 – 2011 Oil Price Rally 3
0.121
S&P500
0.510
0.468
2012 20% Oil Price Dip 4
0.745
1
0.102
TASI and Oil Prices (Brent) 2005 - 2014
+69.26% (+149.60% ann.) 20000
140
+40.04% (+199.65% ann.) 120 15000 100 -30.94% (-60.12% ann.) 10000
-18.75% (-43.44% ann.)
-42.87% -24.27%
+1.89% (-5.90% ann.) -17.10% (-45.74% ann.)
SASEIDX Index - Last Price (R1) 8720.42 CO1 Comdty- Last Price (R2) 72.54 2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
8720.42
80 72.54 60
5000
40
2015 Source: Bloomberg
1 Monthly basis (1/1/2005 – 31/12/2006) 2 Monthly basis (1/1/2007 – 31/12/2008) 3 Monthly basis (6/1/2010 – 31/12/2011) 4 Monthly basis (1/1/2012 – 31/12/2012)
2
© All rights reserved
RESEARCH DIVISION BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Senior Analyst
Analyst
Abdullah Alawi
Syed Taimure Akhtar
Sultan Al Kadi
+966 11 2256250 [email protected]
+966 11 2256146 [email protected]
+966 11 2256374 [email protected]
Senior Analyst
Analyst
Analyst
Talha Nazar
Saleh Al-Quati
Jassim Al-Jubran
+966 11 2256115 [email protected]
+966 11 2256046 [email protected]
+966 11 2256248 [email protected]
General manager - brokerage services and sales
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
Ala’a Al-Yousef
brokerage
Brokerage
+966 11 2256000 [email protected]
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256277 [email protected]
+966 12 6618400 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
AGM - Head of Institutional Brokerage
Central Region
Abdullah Al-Rahit
Samer Al- Joauni
Sultan Ibrahim AL-Mutawa
+966 16 3617547 [email protected]
+966 1 225 6352 [email protected]
+966 11 2256364 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
AGM - Head of Research
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: Madinah Road, Mosadia، P.O. Box: 6277, Jeddah 21442, Saudi Arabia، Tel: 02 6692669 - Fax: 02 669 7761
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
December 2014
TASI & Oil Prices Report: A View On Correlation
Please read Disclaimer on the back
Historically, studies show that stock market returns have a
flat till it collapsed mid 2008 along with oil prices. This event
negative correlation with commodity prices. The data shows
also supports our findings regarding upward and downward
that TASI’s correlation with oil prices is relatively high (on
movements.
a quarterly basis) compared to other markets and is more significant during oil price declines; giving an indication of a higher level of responsiveness during oil price drops.
Shortly after the post 2008 financial mess was the increase in oil prices from $80 to around $120 from 2010 till well over 2012. This increase in prices barely translated to an intense spike or
To put things into perspective, one of the highest levels of
rally in the market. The market barely nudged, it registered
correlation between a commodity and a stock market was
steady gains throughout the following years reiterating our
between crude oil prices and the S&P500 registered by the
finding of slower or gradual reaction to a surge in oil prices both
end of 2013 at a correlation level of 0.4, TASI and oil prices are
in the form of gradual gains and in price shocks.
currently hovering around 0.5. Data indicates that the main variable affecting the correlation coefficient of stock markets and oil prices is whether the country is a significant oil exporter or an oil importer. Oil exporting countries witnessed a peak in correlation levels between the years 2009 and 2013. We should clarify that the S&P 500 and TASI both show a relatively high correlation to oil prices. However, taking the data on a long term (above 10 years) and/or reducing the frequency of computation (quarterly basis) shows that TASI exhibits a higher level of correlation with oil prices than the S&P500. Examining the data over 10 years unveils periods of negative correlation between the two indices. One of the factors contributing to the less than expected correlation is the lagging effect of rising oil prices on TASI. Data shows that periods of rising oil prices are followed, rather slowly, by periods of bullish market sentiment that take a while to materialize into a market
The market seems to have reacted to better economic conditions reflected in increased government spending on development projects. Gradual gains followed the large increase in oil prices a few years ahead. TASI went on a bull run thereafter registering more than a 30% gain from mid-2012 to Aug 2014. The bull run took place in a relatively stable oil price environment. It is important to note that taking oil prices alone as a factor in market movement is rather an oversimplification of the Saudi equity market. Taking the recent bull run as an example, general world economic conditions, projected growth rates, and stimulus plans all had an effect. It is worth noting that 2012 witnessed an oil price dip from $115 levels to $90 per barrel. This large decline shook the market. TASI lost around 10% in two months. Again, this supports the finding stated earlier.
rally. However, the reverse effect is more severe. Meaning, when
The bottom line is that investors seem to react quicker and with
oil prices experience a downward shock the market reacts
a heavier hand to oil price dips than to upsurges. This sentiment
almost immediately, registering a higher downward correlation
is reflected into two main fears, first is the economic condition
relative to upward movements.
and future Economic expansion in the kingdom. Second is the
Further examination reveals that the market rally of 2005 and 2006 had nothing to do with oil prices, neither in the short nor the long term. Oil prices were relatively stable between $50
petrochemicals industry, fear of a bouncy ride for the large companies in the sector, the largest sector in the market . (around 30% of Saudi market profitability).
and $60 from mid-2005 till mid-2006. No price shocks were
It is also important to note that the correlation is not at all
registered at any point neither in the rally nor in the collapse.
meaningless; rather, it is unusual for a market to have such a
We also should note that oil prices rallied more than 15% during
correlation to a commodity’s price movement. The duration
the collapse.
and frequency at which the correlation is computed at makes
Another similar event is during the 2008 crash. Oil prices rallied to over $140 (more than 50% increases) while the market stayed
the largest difference in the outcome, which is an important point to consider when reading and interpreting correlation data. Sultan Al Kadi Analyst
1
+966 11 2256374 [email protected]
© All rights reserved
Thematic Report
December 2014
TASI & Oil Prices Report: A View On Correlation
Please read Disclaimer on the back
The current dip in price is accompanied by cloudy world
disappointing figures from Germany and slower than estimated
economic conditions. Lower oil prices are usually passed as a
growth in China all contribute to the case made by analysts
good indicator for oil importers, reflected almost instantly in
to support that scenario. Deflation is also a possible scenario
economic output and consumer spending. However, we have
contributing to the cloudy state of the markets.
yet to see if this dip in price would amount to the same result.
Worries of a further dip in price are plausible in the short run.
The current worry, according to The Economist, is whether the
Oil importers stock piling at current prices keeps demand at
current prices are a result of weakening global demand or a
current levels. Assuming production at current levels, weaker
surge in oil supply; possibly a combination of both. The first
demand along with an imminent reduction in stock piling
scenario seems to be the one with the largest backing. The
could be the next factor slowly pushing prices further down.
cut in worldwide growth projections by the IMF along with
Correlation (2004 – 2014) Quarterly Basis
Event
Correlation
WTI
Brent
2005 – 2006 Bull Run
TASI
0.540
0.544
2008 Financial Crisis 2
0.578
DJIA
0.412
0.356
2010 – 2011 Oil Price Rally 3
0.121
S&P500
0.510
0.468
2012 20% Oil Price Dip 4
0.745
1
0.102
TASI and Oil Prices (Brent) 2005 - 2014
+69.26% (+149.60% ann.) 20000
140
+40.04% (+199.65% ann.) 120 15000 100 -30.94% (-60.12% ann.) 10000
-18.75% (-43.44% ann.)
-42.87% -24.27%
+1.89% (-5.90% ann.) -17.10% (-45.74% ann.)
SASEIDX Index - Last Price (R1) 8720.42 CO1 Comdty- Last Price (R2) 72.54 2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
8720.42
80 72.54 60
5000
40
2015 Source: Bloomberg
1 Monthly basis (1/1/2005 – 31/12/2006) 2 Monthly basis (1/1/2007 – 31/12/2008) 3 Monthly basis (6/1/2010 – 31/12/2011) 4 Monthly basis (1/1/2012 – 31/12/2012)
2
© All rights reserved
RESEARCH DIVISION BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Senior Analyst
Analyst
Abdullah Alawi
Syed Taimure Akhtar
Sultan Al Kadi
+966 11 2256250 [email protected]
+966 11 2256146 [email protected]
+966 11 2256374 [email protected]
Senior Analyst
Analyst
Analyst
Talha Nazar
Saleh Al-Quati
Jassim Al-Jubran
+966 11 2256115 [email protected]
+966 11 2256046 [email protected]
+966 11 2256248 [email protected]
General manager - brokerage services and sales
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
Ala’a Al-Yousef
brokerage
Brokerage
+966 11 2256000 [email protected]
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256277 [email protected]
+966 12 6618400 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
AGM - Head of Institutional Brokerage
Central Region
Abdullah Al-Rahit
Samer Al- Joauni
Sultan Ibrahim AL-Mutawa
+966 16 3617547 [email protected]
+966 1 225 6352 [email protected]
+966 11 2256364 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
AGM - Head of Research
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: Madinah Road, Mosadia، P.O. Box: 6277, Jeddah 21442, Saudi Arabia، Tel: 02 6692669 - Fax: 02 669 7761
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
