Global markets plunge on trade jitters, Saudi market ‘resilient’: Analysts

Global financial markets plunged as fears of a full-scale trade war intensified following the US administration's tariffs, which were met with retaliatory measures from China. This stoked risk aversion among investors, raising concerns about a potential global recession.

Analysts told Argaam that the market reactions were warranted given the current tensions, noting that the uncertainty led to a large-scale sell-off, particularly in Asian markets, which are more sensitive to export dynamics.

The analysts also noted that the Saudi market showed relative resilience despite global woes. They expect volatility to persist until the trade negotiations between the major powers take a clearer direction.

Market turmoil

Tarek Al Rifaie, CEO of Quorum Center for Strategic Studies

The US administration's 10% tariffs on trade partners and China's response of 34% tariffs on US imports caused a sharp sell-off in global markets, said Tarek Al-Rifai, CEO of Quorum Center for Strategic Studies.

The near-term outlook for the stock market remains uncertain. Indices such as the Nasdaq may record temporary rebounds after entering bear market territory but remain vulnerable to extended volatility, he added.

Al-Rifai advised caution, urging investors to focus on risk management and prioritize long-term investment strategies.

US economic slowdown and trade tensions
 

Ahmed Shamsuddin, Head of Research at EFG Hermes

Ahmed Shamsuddin, Head of Research at EFG Hermes, explained that the global markets’ reaction to trade tensions was justified, particularly as signs of a slowdown in the US economy emerged in late 2023.

He pointed to declines in key consumption indicators, including car sales, building materials, and restaurant activity in December, January, and February compared to the same months the previous year.

The slowdown is normal within an economic cycle that takes between five and seven years, said the analyst, adding that financial markets usually do not respond unless there is a "catalyst," such as trade escalation, which led to violent reactions, especially in Asian markets.

“The biggest impact was on countries that rely heavily on exports, such as South Korea and Taiwan, whose exports represent more than 50% of GDP, while China's dependence on the US market fell from more than 35% to about 17-18%,” said Shamsuddin.

He added that the Saudi market is beginning to show signs of recovery, but volatility may persist for another week or 10 days until the outcome of the trade negotiations becomes clearer. He anticipates that an agreement will be reached, as continued tension benefits no party.

Direct impact on the Saudi market and investors

Hussein Al-Attas, a financial analyst

Hussein Al-Attas, a financial analyst, said that the Saudi market has become more vulnerable to global volatility after its inclusion in emerging market indices, noting that trade tensions have caused a decline in liquidity and sell-offs by foreign investors.
 

Moreover, local investors have tended to be cautious and move towards defensive sectors such as telecoms and healthcare, while foreign investors have reduced their exposure during periods of peak trade tensions.
 

“Meanwhile, the energy and petrochemical sectors were hit hard by the slowdown in global demand and falling product prices, impacting companies like SABIC, Saudi Kayan, and Petrochem. This, coupled with the slump in oil prices due to the Chinese slowdown and increased supply, has added pressure,” said Al-Attas.

He also pointed out that weak global demand, driven by the US-China trade war, has led to a reevaluation of growth expectations in the petrochemical sector, negatively affecting investor valuations of these companies.

Al-Attas noted that the TASI benchmark index showed signs of correction, in line with global markets, as it remains closely linked to external developments. He expects continued volatility if the trade conflict escalates or if negative economic data emerges from major economies.

Increasing Caution

Al-Attas added that although the Saudi market remains supported by domestic factors such as government spending and economic reforms, the correlation with global markets has become more evident after the upgrade to emerging market indices.

The trade war has fueled foreign investor hesitation toward emerging markets, said the analyst, noting that the Saudi market, despite its inclusion in the MSCI and FTSE indices, continues to experience fluctuations in foreign inflows.

He also indicated that foreign investors are now more inclined to reallocate their investments away from markets highly exposed to trade conflicts.

The impact of US policies on budget and debt

Shamsuddin pointed out that the US economy faces structural challenges related to the sustainability of public debt service, especially in light of rising interest rates and current debt levels in the G7 countries.

He indicated that the equivalent of 3.5% of the US GDP is needed to balance the budget, which requires either a radical change in the tax structure or a significant reduction in spending, adding that the tax cuts pursued by the Trump administration may not effectively contribute to bridging the fiscal gap.

The analyst also emphasized that these challenges create significant pressure on monetary policy, noting that lowering interest rates may be necessary to stimulate the US economy, but that it would, in turn, deepen the public debt crisis.

Limited impact on GCC countries

The impact of the global slowdown on Gulf countries will likely be indirect, through the decline in oil prices, which may put pressure on public budgets, especially in Saudi Arabia and Kuwait, said Shamsuddin.

“Saudi Arabia may face financing pressures if oil prices remain at low levels. However, the Kingdom remains in a strong financial position, with a debt-to-GDP ratio of less than 30%, which gives it the resilience needed for borrowing to finance its projects,” he said.

The analyst also pointed out that Saudi Arabia needs to activate the debt market as part of its plans to finance infrastructure projects and economic diversification programs, noting that the current market size does not exceed 3-4% of GDP, while it should be between 12-15%.

He added that debt levels rising to 50-60% of GDP are not a major threat given the strength of the Kingdom's financial position, stressing the importance of developing the local debt market as a means of providing liquidity and promoting private sector growth, especially SMEs.

Continued momentum

The economic reform programs in Saudi Arabia are a strategic necessity rather than an option, said Shamsuddin, pointing out that the Kingdom's economic transformation is driven by demographic factors, including the high percentage of youth and the increased participation of women in the labor market.

The real estate sector in Saudi Arabia represents a huge opportunity for growth, with the country needing more than one million additional housing units by 2030, with major government projects such as ROSHN and Al Jadiyah only covering half of this need, he added.

The analyst also noted that the real estate market is still at an early stage, as there is no real secondary market for real estate, which opens the door to long-term investment opportunities.

As for the promising sectors, Saudi banks are enjoying strong growth and high returns on capital of 10-15% and are currently undervalued, making any price declines a buying opportunity, he stated.

“The utilities sector is also stable and promising,” Shamsuddin said, calling for a focus on diversification within the market and increasing institutional investments, including non-bank finance, which will play a bigger role in the future in addressing the financing challenges resulting from oil price fluctuations.

Cautious Optimism

Shamsuddin said that the next phase is likely to witness partial understandings or temporary settlements on the level of trade tensions, noting that the continuation of the trade dispute between the US and China without an agreement has profound negative effects on the global economy.

In addition, markets are waiting for signs of progress in the negotiations. What is currently happening is a “trigger" or a catalyst for market movement, as markets resort to these critical points to start waves of correction or repricing, according to Shamsuddin.