RIYADH, 4 May 2005 — Saudi shares may bounce back to fresh records in coming weeks but are unlikely to maintain the oil-fueled momentum that has quadrupled their value in two years, economists and analysts say.

The benchmark index of the biggest Arab stock market has eased more than 6 percent from a peak of 12,053 points last month.

It reached the peak as high international crude prices brought cash flooding into the world’s top oil exporter and then slipped back along with oil price declines.

The bourse, up 37 percent so far in 2005, remains sensitive to oil prices and is likely to fall further if oil retreats much below $50 a barrel. But most analysts predict further limited gains this year, along with more volatility.

“I don’t expect a similar performance to last year,” said financial consultant Salim Ghalayini, referring to the 2004 increase of 84 percent. “Growth this year will definitely be lower”.

Corporate profits are soaring in Saudi Arabia.

Last year petrochemical giant SABIC doubled its earnings to $3.8 billion. And the results have extended into the first quarter, with profits up over 50 percent from the same time last year.

But the rise in profits has been outpaced by even steeper gains in stock prices, driven by a wave of petrodollars flooding into the economy and a lack of investment opportunities outside of the bourse.

The country’s money supply grew 17 percent last year, the fastest growth since the last oil boom a quarter century ago, and has already risen 5 percent in 2005.

Banks’ consumer lending is also up, adding to the investors’ cash pile.

“There is still cash around which has not been invested ... so it will continue to pump into prices,” said Ghalayini.

Public appetite for stocks has been whetted by high-profile offerings. Demand for shares in telecoms provider Etihad Etisalat was 50 times the amount on offer in November, and half of all Saudis subscribed to the offering by Islamic Bank Albilad.

Albilad applicants got just four shares each but then saw the SR50 stocks hit SR950 on their debut on Saturday.

Last month’s decision to open up Saudi banking and insurance shares - until now reserved for Saudis - to all Gulf nationals has added to the pool of hungry investors.

The galloping growth of the Saudi stock market and smaller neighboring markets, however, has stoked fears of a regional stock bubble.

Shares in Saudi Arabia are now priced at an average of 27.1 times earnings over the 12 months through the first quarter, compared with a historic level of 16.8, according to a report this week by Riyad Bank.

“The Saudi market has gone up more than is logical if you just look at profit growth,” said Riyad Bank investment analyst Riyad Murad.

“There is a strong view that the high liquidity will keep pushing up prices. But if there is any drop in oil prices, people will take advantage of it (and sell),” Murad said.

But National Commercial Bank Senior Economist Muhammad Malick said that if first-quarter profit increases of 56 percent extend through the rest of the year, the Saudi stock index could reasonably end 2005 between 12,000 and 13,000 points.

“If the market goes up to 13,500 points, the PE ratio would be around 32, which looks expensive,” Malick said.

“But if the index reaches 12,000 to 13,000, the valuation will be below 30, which could be absorbed by the market given the levels of liquidity, appetite for stocks and the limited number of free float shares”.

Ghalayini said that after opening up to Gulf nationals, the Saudi market is vulnerable to investors who may pull out quickly when they see a better opportunity in the region. “So volatility will increase,” he said.

“Then I would expect a correction — and it would be an avalanche,” Ghalayini said. “In the absence of that, I expect the market to keep growing.”