RIYADH, 11 March 2006 — The erratic behavior of the Saudi stock market (Tadawul) is the result of its manipulation by key speculators, according to a Saudi financial consultant with over two decades of experience.
“Less than 12 percent of the shares in the Saudi bourse are open to investors, while 88 percent or so of the equities are owned by major government entities, strategic investors and some big business families,” Motasher Al-Murshed told Arab News.
He has advised investors to calm down if their share values have dropped sharply following the stock market correction.
“Don’t remain glued to the computer screen. Take a break for three or four days and don’t act in panic. It’s not good either for your health or the health of the stock market,” said Al-Murshed.
He described recent reports of people getting heart attacks linked to plunging stock prices as exaggerations if not completely unrelated. A spokesman of the King Faisal Specialist Hospital & Research Center said they get heart patients on days when stock prices plummet. “But how can one relate it to the events on the stock market?” he asked.
According to Al-Murshed, the situation created by the lack of adequate investment channels has made the Saudi stock market “thin” despite the huge funds to be invested. This has made it vulnerable to wild swings. The only solution was to have in place a “market maker” — a mechanism that could act as a safety valve and prevent the market from hitting peaks and troughs. Currently the Saudi Capital Market Authority (CMA) regulates the Tadawul so that it cannot gain or lose more than 5 percent from the value at the beginning of the trading day. However, recent stock market fluctuations are seeing values of benchmark stocks hitting very close to these peaks and troughs, which is indicative of market speculation for short-term gains.
The effort to contain these ups and downs within this regulated band is not a substitute for the types of regulations needed to control the unethical players of the stock market, said Al-Murshed, who also pointed out that making more stocks available to the wider population may help curb too many people chasing after too few available stocks.
“There is a lack of transparency in the market, whether it relates to a company’s expansion program or its profit and loss account. So despite the efforts of the CMA to introduce the 5-percent fluctuation band to curb wild swings in either direction, there is not enough liquidity in the stock market,” he observed.
Explaining the prolonged bullish run on the Saudi stock market, Al-Murshed said a major contributory factor was the fact that the number of stock traders rocketed from 40,000 in 2003 to 2.5 million last year. Thus, with too many investors chasing too few available stocks for trading, there was an unrealistic price jump in share prices leading to an unwarranted steep rise in the share value of an agricultural company in one case.
He suggested that the Ministry of Finance could create or ask the existing funds (like the Public Investment Fund, for example) to take over the role of a market maker as long as the market forces i.e. the supply and demand of shares remain lop-sided.
“When there is an uptrend in the market, there will be huge amount of capital chasing very few number of shares. This, of course, creates unrealistic price levels for the small companies, which have weak balance sheets. It also exaggerates market swings-up or down. The proposed market maker will step in during times when there are many sellers and few buyers. It will also ease the pressure to sell or buy and act as a safety valve,” Al-Murshed said, adding that the recent government intervention in Kuwait prevented turbulence in the stock market there.