Saudi stock market watchers are now amazed at the seeming docile nature of daily trading on the Saudi bourse. Is this, one wonders, the long-awaited maturity of the Saudi investors taking place or due to the greater level of transparency now required by companies listed on the stock exchange? The answer seems to be a mixture of both, coupled with a large dosage of expert intra-day speculative trading within sharp limits.
The Saudi investor seems to have taken the lessons of the recent disastrous fall in share prices on board and is extremely cautious now, preferring to make small steady gains on intra-day trading, rather than assume longer term speculative positions. Gone is the talk of a quick return to the high levels of the peak 20,600 Tadawul Index of early February this year, with Internet and other social discussion concentrating on giving tips on which stocks are safer bets in the daily trading.
This however, is the crux of the matter. The seemingly more docile trading nature and limited adventurism of the Saudi investor is probably due to a small measure of the growing awareness and importance of investment fundamentals in stock picking, but to a larger degree of playing it safe on intra-day trading.
Growing investor investment maturity translates into long-term stock holdings based on company performance, expected business, and the general state of the domestic and international economy. These would be factored into current and future prices and higher rated companies would see their stock prices remain steadier in the long term despite some volatility due to unexpected external political events. What has been happening in the Saudi stock markets recently and almost on a daily basis, has been almost extremely predictable short term selling and buying of all types of stocks, irrespective of their individual business led economic fundamentals or external-led events.
Accepted wisdom had earlier argued that higher oil prices positively affected the Saudi stock prices. Despite near record international oil prices, the Tadawul Index has hovered at between 10,500 to 11,500 index levels, and has not registered a higher oil price led rally. Similarly, the recent catastrophic events in Lebanon and regional tensions have not seen the Saudi stock market crash through the psychologically important 10,000 barrier, as there certainly seems to be large buying support at that level. What has been driving the markets then? The answer seems to be a large degree of intra-day manipulative trading by core groups of more “sophisticated” investors who trigger buying spurts and then sell-off after certain threshold index levels have been reached. One can only look at the trading patterns of the past few months to see the same daily peaks and troughs unfold.
Who can fail but to notice the uncanny daily similarities of intra-day trading? The markets would say, open at 11,400 and a flurry of initial sale orders would drive it down to 11,250 before a buying rally takes it to 11,490 by the morning dealing session market close. In the afternoon, the market would open with another flurry of selling orders, bringing it down to the 11,300 levels and then the fun and excitement begins for those in the market.
The bourse would witness a contest of will between those pushing the index down only to be followed by small spurts of buying. Before the second session’s market close, there would be a mad rush and near panic to establish either a lower or higher band index from which to start the game all over again the next day. Saudi stock trading still seems to be a game for many investors, and devoid of basic fundamentals for the most part. There is absolutely no economic or other rationale on why all the stocks seem to behave in such a herd-like fashion of ups and downs several times a day, except to suspect some adept and sophisticated manipulation of prices is taking place, and which, once again, takes the small, unsophisticated Saudi investor in the direction some market players want them to go before these “ expert” market makers take profit and close for the day.
The market experts have also learned the lesson that is unwise to keep propelling the Saudi Index into ludicrously higher levels, sucking in small investors. The name of the game is now one of being more adept at intra-day managed gyrations in market prices. This type of market behavior is also unsustainable in the long term as even the most unsophisticated small investors, currently being led by the nose, will soon figure out what the rules of the game is all about. They will also want to cash in and out during the day and very soon the market will have absolutely no clear direction in which to go, because price uncertainty will set in and dominate trading instead of economic and business fundamentals. This is where the recently announced listed company regulations by the Capital Market Authority can play an important role in ensuring that greater transparency helps investors make the correct long term investment decisions.
The regulations are comprehensive and cover shareholder rights, transparency in the functioning of the company, the chairman’s duties and responsibilities, the need for publicizing a company’s activities and keeping shareholders informed on material events likely to affect the business operations, and hence, market valuation. The CMA is working hard to ensure that, eventually, the Saudi bourse is a more transparent and safer investment vehicle both for the sophisticated and relatively unsophisticated investor. Until these regulations are fully implemented by the Saudi listed companies, we will continue to witness the daily excitement of the gyrations of the Saudi Tadawul index during its two trading sessions.
—Dr. Mohammed A. Ramady is visiting associate professor, Finance and Economics, King Fahd University of Petroleum and Minerals.