Saudi Arabias health care sector will continue to register high growth as companies expand their capacities, Al-Rajhi Capital said in a recent report. It also said that 2015 is expected to be a year of mixed sentiments for Saudi Arabia. There is high optimism among investors as the Kingdom plans to open up its equity market to qualified foreign institutional investors (FIIs) for direct ownership, while on the other hand, oil prices have dropped significantly and recovery is expected to be sluggish, said the report titled Saudi Arabia: Equity Market Outlook. A countercyclical budget for 2015 despite the drop in oil prices is likely to boost the nonoil sectors. Favorable demographics and an increase in wages will benefit the consumer-oriented sectors, especially the food sector. The health care sector will continue to register high growth as companies expand their capacities. The ongoing spending on housing and infrastructure will boost the cement sector, although the labor crisis and the high level of clinker inventories are likely to pose impediments. However, if oil prices do not recover, the petrochemical sector can see a decline in earnings as its product prices are linked to oil prices, said the report. Since the petrochemical sector contributes to around a third of the earnings in the Tadawul All Share Index (TASI), the overall earnings growth in 2015 is likely to be low. High dividend yields are likely to support the current price levels but any further decline in oil prices is a key risk. Our top picks are: SABIC, SAFCO, STC, Herfy, Al-Othaim, Maaden and Shaker, said Al-Rajhi Capital. Year of mixed sentiments: Saudi Arabia is likely to allow foreign investors to have direct ownership of stocks in 2015, which has heightened the optimism among investors. The TASI jumped 15 percent in the weeks following the announcement in mid-2014 and if empirical evidence is to be believed, the TASI is expected to climb again prior to the formal implementation. However, we feel any rally would be largely driven by sentiments rather than fundamentals. Meanwhile, the recovery in oil prices is expected to remain sluggish, which is likely to weigh on investor sentiments. Countercyclical fiscal expenditure: Despite the drop in oil prices by 50 percent in 2014, the fiscal expenditure for 2015 has been budgeted at SR860bn, the highest-ever for the Kingdom. This shows the Saudi governments intentions to continue investments for diversifying its economy. The large budget comes at a time when the overall growth has slowed down in Saudi Arabia as well as in many other countries. Therefore, we believe the move is countercyclical and is expected to boost the non-oil sectors. Outlook for nonoil sectors: Defensive sectors such as health care and food will witness healthy growth in 2015. Hospitals are expected to announce more expansion programs to their already rapidly increasing capacities. We do not expect a quick turnaround in the cement sector because of the huge existing inventories, restricted gas allocation issues, labor issues in construction etc. We are Neutral on the retail sector given its slowing same store sales growth and high valuation multiples. Net interest income of banks would benefit if the US Fed hikes its rates, while non-interest income would see mixed impact from lower consumer loan fees and higher brokerage fees in 2015. Outlook for petrochemical sector: The petrochemical sector is expected to see a decline in earnings on account of sluggish oil prices and demand slowdown in key economies. Since the Petrochemical sector contributes to around a third of TASIs earnings (and 20 percent of TASI Index) the overall earnings growth of the Saudi market is likely to be low. The sectors cyclical nature makes it wise to invest during troughs; however, we expect a sluggish recovery for oil prices and thereby, for the Petrochemical sector. However, we believe this is one of the most attractive entry points for a long-term investor. Top picks: Overall, 2015 is expected to be a year of mixed sentiments for Saudi Arabia. The countercyclical fiscal expenditure and high dividend yields are likely to support current price levels but further decline in oil prices remains the key risk. Among the companies, our top picks are SABIC, SAFCO, STC, Herfy, Al-Othaim, Maaden and Shaker. Al-Rajhi Capitals report also said: Even if the drop in oil prices continue, we believe that the government can sustain the current levels of expenditure even as budget turns into a deficit for longer periods considering the Kingdoms negligible public debt-GDP ratio and large government reserves built up over the years. In the medium term, the governments focus is likely to remain on building physical and social infrastructure and enhancing employment opportunities for citizens. It added: The health care sector will continue to remain one of the priority sectors for the government and private hospitals will rapidly scale up their capacities. However, we think the performance of the retail sector will slow down slightly given the sluggish same-store sales growth and high valuation multiples. The report said: The telecom sector is expected to continue facing low growth issues due to intense competition and saturation in market subscribers. However, the sector will continue to be an attractive dividend play in 2015. The issues around Mobily and Zain KSA have impacted the share price of STC as well. We think this is unjustified given that the company has been gaining strength over the past few quarters. We favor STC as one of the top picks for 2015. The report pointed out that all the listed hospitals have announced significant expansion plans and new projects across the Kingdom over the next 4-5 years. Despite these initiatives, demand continues to outpace supply. The sector will experience rapid growth as long as waiting periods at hospitals continue to remain high. It said: Mandatory insurance has been instrumental in the growth of private health care firms. Unlike Dubai or Abu Dhabi, insurance has so far been made mandatory to only expatriates and Saudi nationals (along with families) working in private firms. We believe that it is only a matter of time before insurance will be made mandatory for nationals as well.

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KSA health care firms to record high growth