Al-Rajhi Capital, a major investment firm, has published a strategy report titled “Best of the rally seems behind; stay cautious”. 
The report highlights that the trend of institutional investors becoming more prominent in the market (by both ownership and trading activity) seems to be picking pace this year, while retail participation continues to remain weak. 
According to the report, the companies with larger index weights are expected to continue to outperform the broader market regardless of the market direction and recommends a cautious stance post the 20 percent rally in the markets over the last 3 weeks. 

Some of the key details of the report are:

• Institutional investors continue to gain prominence; a structural shift underway: 
Apart from the consistent ownership gains over the past few years, the report notes that the institutional investors’ share of traded value in the last two weeks has risen to 29 percent, compared to the last year average of 17.5 percent and last 6 years’ average of just 13 percent. 
The consistent trend of institutions gaining prominence in the share of traded value may well become a structural trend as it is also supported by regulatory preference and policies.

• Local mutual funds driving the current rally: 
Local mutual funds have driven most of the market rally over the past three weeks, on the back of SR9.2 billion (20 percent of holding) worth of net-buying and depleting their buying power with little or no participation from other investor categories.

• Large caps continue to outperform the broader market: 
Large cap companies continue their consistent outperformance compared to the broader market, regardless of the market direction. 
Over the past 4 months, about 75 percent of the top 25 companies by market weight outperformed the broader market (TASI), while it trended down to 36 percent for the next 25-50 companies. 
The outperformance was even lower for the next 50 companies by market cap at just 14 percent.

• Most of the rally seems behind; Prefer to stay cautious: 
The key trigger for the market rally which started after mid-October has been the issuance of $17.5 billion sovereign foreign bond, which was further supported by the government’s announcement in early November that SR100 billion in delayed payments to private sector will be cleared by the end of December 2016. 
The above measures helped in assuaging the major investor concerns such as liquidity and credit quality. 
Al-Rajhi Capital’s report also said: “Nevertheless, we prefer to stay cautious and the investors are likely to be better off by partially booking profits, as the downside risks are getting higher with the lack of visible triggers in the short term. Some upcoming events like OPEC meeting and Saudi budget may cause heightened market volatility whereas the Q4 earnings will likely witness the impact of recent austerity measures.” 
The researchers said: “Further, with institutions likely shifting to side-lines post strong participation in the recent rally and retail investors not providing support, we believe that most of the rally seems to be behind us and hence our cautious stance.”
Al-Rajhi Capital believes that the large cap companies with stable business models and diversified revenue streams in core sectors will fare better and show resilience in times of uncertainty. 
Given the significant rally during the past three weeks, Al-Rajhi Capital prefers to be cautious and wait for more reasonable entry points given the increased downside risks from current levels. 
A strategy focusing on large cap stocks and higher cash positions is likely to lower downside risks while ensuring that any further upside will not be missed completely.

Source: Arab News