JEDDAH, 18 July 2005 — After two record years, the Saudi equity market seems to be heading for yet another record year with no sign of changing direction. The market has passed through the first six months of this year with a respectable gain totaling 64 percent. Since the end of 2000, investors in the Saudi equity market reaped 495.8 percent gain on share prices hike besides gaining on cash dividend receipts of around 2.5 percent annually and around 1 percent from the distribution of free bonus shares. Thus, the overall wealth of investors increased by well over 500 percent during the last five-and-half years through June 2005.

In the most recent period of 12-month to 30th June 2005, the Tadawul All Shares Index (TASI) rose by 135.5 percent to close at 13,454.77 points, suggesting an increase of 7,742 points during this period. High profitability growth of around 45.5 percent in 2004, low interest rates along with high liquidity, higher oil prices and its ripple effects on the various sectors of the domestic economy are the major drivers of the Saudi equity market this year. The market rally is projected to continue on the expectation of 35 percent earnings growth in 2005.

Although the flotation of Bank Albilad, SADAFCO and NCCI together brought into the market 76.5 million new shares and fetched in around SR2.6 billion from the market this year, high liquidity and strong profitability are underpinning investors confidence.

Market Valuation

The overall average market valuation has been gradually edging up from 25.69 PE at the end of December 2004 to 33.04 PE (forward looking) on 30th June 2005. This implies, how over-ambitious investors in the Saudi market are by continuing to bid for higher prices and paying an additional 28.6 percent to buy Saudi stocks than they were doing at the end of December 2004. Despite 35 percent expected earnings growth for 2005 along with strong economic fundamentals, the market seems to have now entered into somewhat high valuation zone where any negative factor can trigger profit-taking led selling spree. If it does, however, is not expected to be deep but a market correction.

Market Capitalization and Bonus Shares

The market capitalization of the Kingdom’s 76 listed stocks has reached around SR1.94 trillion ($517 billion) on June 30, 2005, compared to SR1.15 trillion ($306 billion) at the end of December 2004, adding SR791 billion ($211 billion) to the wealth of investors.

Adjusting for incremental market capitalization due to new listings, the wealth impact was equal to SR782 billion ($208.5 billion) during the first six months of this year. The market capitalization as a percentage of estimated nominal GDP has reached 189.3 percent on June 30, compared with 122.4 percent of the total nominal GDP of SR939 billion for 2004. This suggests that the market depth is rising rapidly to a point where speculative trading dominating market activities.

Meanwhile, eight listed companies increased their paid-up capital through capitalization action and issued 250.65 million bonus shares in the last six months. These companies, which increased their paid-up capital, are SABIC at one bonus share for each three shares, NIC at three shares for every five shares, Riyad Bank at one share for every four shares, Al-Rajhi Bank at one share for every one share, Arab National Bank at one share for every four shares, and Saudi Industrial Investment Group (SIIG) at one share for every two shares. In addition, three new IPO issues brought 76.5 million new shares to the market. The total supply of shares increased by 12.6 percent to 2.93 billion at the end of June 2005, from 2.6 billion at the end of December 2004.

Sectoral Performance

Across sectors, industrial stocks were the major beneficiaries of this continuous rally, rising 19.7 percent in the month of June that further lifted the gain to around 96.1 percent since the start of 2005. The share price of SABIC, with 73 percent weight in the industrial sector and around 26 percent in the whole market, rose 113 percent in the first six months of 2005. Stocks of industrial sector companies were quoted at 29.63 forward looking price earnings multiple (PE), while those of SABIC bid at 25.04 PE at the end of June 2005.

The nine least capitalized agricultural companies benefited from the release of arrear payments by the government and rose 37.3 percent in June 2005, bringing the total gain for the first six months of this year to around 91 percent. Except for TADCO, the other eight agricultural companies are considered highly overvalued. Based on the expected earnings for 2005, the sector’s average PE ratio was 66.36 at the end of June 2005, almost twice the overall market average. Share prices of NADEC and Qassim Agricultural Company have more than doubled during the last six months, lifting their PE ratios to nearly 100 and signaling some correction led selling.

With PE ratio of 42.11 at the end of June 2005, share prices of the 18 services sector companies rose 81.1 percent during the first six months of this year with several stocks rising in triple digits.

Prices of bank stocks rose 7.5 percent in June and 62.6 percent between January and June 2005. Based on the 2005 expected earnings, share prices of the ten banks were quoted at 38.21 PE by the end of June 2005.

Profitability and the capacity utilization of the eight cement companies are expected to level off in the coming months. The 60.2 percent rise in the share prices of the eight companies appears to have overdone with the sector’s PE ratio hovering around 33 and price to book value of 8.3 at the end of June 2005. With no surplus capacity left to sell more cement, profits are not expected to grow in the coming quarters, and thus stocks selling could emerge to dampen small investors’ over confidence.

The telecom sector still has some room to rise further after gaining 47.6 percent during the first six months of this year. In the absence of corporate results from Etihad Etisalat, financial indicators of the telecom sector are represented by Saudi Telecom Co. (STC). Excluding Etihad Etisalat, the sector average PE was 20.73 and price to book value ratio of 9.24 at the end of June 2005.

Expanding Trading Value

The bullish sentiments have been dominating the market activities and the volume of trades and turnover improved significantly in the first six months of 2005. The rise in the stock prices contributed to a 101.4 percent increase in the value of shares traded to a record SR1,615.1 billion in the first six month of 2005, from SR801 billion in the same period of last year. However, the volume of shares traded declined by 6.6 percent to 5.26 billion shares in the 6-month to June 2005, from 5.63 billion shares in the same period of last year.

The average value per trade transaction declined by 29.7 percent to SR100,251 in the January-June period of 2005, compared with SR142,536 over the same period of last year. The decline in the average value per trade transaction suggests rising activities by small and medium traders.

(Said Al-Shaikh is chief economist at the Jeddah-based National Commercial Bank.)