Dr. Mohamed A. Ramady
Publication Date: 
Mon, 2007-03-19 03:00

Saudi stock market players seem to be at it again. During the recent global stock market upheavals that started with China and ended in New York, with screens flashing red, something curious happened in Saudi Arabia. A sense of euphoria took over.

Local stocks which had been listless and directionless, suddenly sprang into life and flashed green.

The Tadawul index moved up by around 8 percent in a few days, and tried to break the 9,000 levels, after having been around the 8,100 levels for the past few weeks. And then something more extraordinary happened.

The international stock markets seemed to rebound, especially those in Asia, after analysts concluded that the falls had gone too far, and there was still value in stocks. In Saudi Arabia the opposite happened.

The Tadawul lost ground, as Saudi investors hurriedly sold out and took profit. The local market seemed to be out of sync with the rest of the world, with no apparent correlation. If this had occurred once, we could put it down to temporary phenomena, and explain it away in terms of a flight to safety in local markets.

The above events were repeated, however, when the global markets once again took a dip based on US housing data, and the Saudi markets rebounded. Some have argued that the non-correlation of the Saudi market was because it was not cross-listed with other stock markets.

If it were, then it is also argued that sharp falls in one market would be corrected in another, based on technical and fundamental analysis of undervalued stocks.

Until that happens, and the Saudi market opens up to international investors with stocks cross-listed, one has to fall back and try to analyze the behavior of Saudi market investors.

Analyzing trends over the past 12-14 months, one can describe the events of the Saudi market as having gone through cycles of euphoria, rationality and amnesia in unequal closes. Due to perceived lack of transparency and stock trading training that is based on technical and fundamental principles, the Saudi market had seemed to be gripped by a mass psychosis.

This typifies the period of financial euphoria when the Tadawul reached a peak of 20,900 in February 2006. In this period, the general paper profit-making becomes, temporarily, a self-fulfilling prophecy that leads to a self-sustaining and self-congratulatory behavior.

This sucks in both the “irrational” unsophisticated investors as well as the “rational” analytic inclined investors. In economics terms, this leads to all investors having a “vested interest in error.”

As members of a crowd, all are willing to suspend disbelief on what is happening. The herd mentality sets in. This is what actually happened in the run-up to the market peaks of 2006.

Those that dared raise doubting voices — and this writer was among them- are condemned vociferously by vested interests, in the period of mass suspension of disbelief. The period of euphoria is also overlaid with amnesia.

Society, it seems, falls into a trap of extreme shortness of financial memory and ignorance of financial history, which leads to the same mistakes being repeated under almost similar circumstances, within a few short years.

In our region we had the Souk Al-Manakh fiasco in Kuwait in the 1980’s, the Al-Rayyan collapse in Egypt in the 1990’s, and the suspension of the Al-Eid and Juma Investment Group in Saudi Arabia in the 2000 era, all based on pure greed and the suspension of rationality and the common sense notion of “what seems to be too good to be true, is not always true.”

Following the period of financial euphoria, the inevitable crash occurs, as doubts and unease creeps in. All that is required for the crash to occur, is either a market-related or an external event, or in the case of Saudi Arabia, for the rumor will circuit to take over.

So where do we stand now in the scale of Saudi stock trading emotions? A lot has happened since February 2006. The market regulators — the Capital Market Authority (CMA) — have introduced tougher sentences on insider dealers, suspended listed companies, and have insisted on more transparent listed company reporting requirements.

This seemed to have brought a certain degree of public confidence. The result is that, since January 2007, the Saudi market can be characterized as one of seeming rationality, despite some occasional bouts of short-listed intra-day trading euphoria. The Tadawul index now reflects a more cautious, but rational behavior, with investors swayed by CMA actions and announcements, as well as a closer analysis of company financial results and professional stock market company evaluations.

Trading ranges have remained within narrow bands, and gone it seems, are the daily 8-10 percent price fluctuations. Let us hope it stays that way, so that both public confidence and technical expertise builds up, before another bout of amnesia and euphoria sets in.

The writer is visiting associate professor, Department of Finance and Economics, King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia.

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