There are two parallel economic events that have been unfolding in the Saudi economy. First, the Saudi economy itself and second the Saudi stock market.

The Saudi economy has never been stronger. The consumer price index and the producer price index both indicate very low inflation rate of around 0.5 percent and real GDP growth of 6.5 percent and nominal GDP growth of 22.5 percent, the difference due to increase in price of oil export. Low interest rate, increase in bank lending and double digit corporate earnings are all positive indications. The current account surplus is approximately SR330 billion ($80 billion). The 2006 budget is by far the largest in the Kingdom’s history and along with private spending is positioning the economy for robust economic growth during the next couple of years. The consumer confidence is very high.

Now the second issue that is in everybody’s mind. The TASI and the stock market and its performance. What has happened to the stock market since Dec. 31, 2005? As we speak the TASI is down 40 percent or 6,665 points from 16,712 to 10,074. On Feb. 23 of this year it broke the 20,000 mark. Like the TASI all other indices are down significantly. The Banking index is down 25 percent or 10,000 points for the year and the Industrial index is down 50 percent or 21,000 points during the same period.

What is interesting to note is a comparison between the Saudi economy and stock market and the US economy. Like the Saudi economy the US GDP is strong (around 3.5 percent) with low inflation and low unemployment. However, unlike Saudi Arabia the US economy has significant budget deficits and current account trade deficits. Both these facts have caused the dollar to decline against the euro and the yen. US stock market (DJIA, S&P and the NASDAQ), however, has remained strong. Year-to-date the DJIA is up 8.02 percent, the S&P 500 is up 6.44 percent and the technology heavy NASDAQ is up 8.56 percent.

How can one explain, when we compare the two economies; the economic conditions and the stock market. In both the economies, consumer confidence is very high. Major noticeable difference between the two countries is in the level of investor confidence. In the US the investor confidence is also very high, whereas in Saudi Arabia the investor confidence is most probably at an all-time low.

It is stated with proper statistics that the stock price here is over-valued. The trailing price to earnings ratio of the Saudi market in its peak was around 45 compared to the BRIC (Brazil, Russia, India and China) economies around 25 and the S&P around 20. Today’s TASI index reflects the P/E closer to the BRIC economies. What is the fair market value of the TASI? Is it 14,000? 20,000? What is important to understand by calculating the fair market value for the TASI along with reasonable P/E, one should be able to establish a band along which the TASI index should trade.

If one looks at other statistics to understand the volatility and reviews weekly average value, average volume, average number of trades and average size of trades one will quickly notice the volatility is reflected in value and not so much in volume, number of trades and size. This trend indicates a very low investor confidence level in the market. Most of the investors are standing on the side-walk and waiting and watching

The CMA has a new chief. A change at the top during turbulent times is always considered a positive move. The market likes such changes as a breath of fresh air. However, one cannot expect miracles. Investors still must look into the fundamentals of the companies they plan to invest as well as their investment objectives and risk tolerance.

(Faisal Alsayrafi is president & CEO of Financial Transaction House.)