When the Saudi stock market bubble burst earlier this year and the Saudi stock market, the Tadawul, took a dive, the howls of financial pain could be heard from one end of the Kingdom to the other. Stories of dreams dashed, fisticuffs in bank lines, of marriages called off because of suddenly impoverished grooms, of families ruined, filled the press. There were demands from traders for government intervention — that it underwrite their losses. The cries inevitably fell on deaf ears; the authorities were not prepared to bail out the punters and throw the whole ethos of private-sector capital investment into reverse. There was no end to pundits willing to provide their assessments of what had happened and the consequences. They warned against day trading and advised consumer stock investors to think about long-term investment rather than get-rich-quick prospecting. Too many punters chasing a limited supply of stock had sent shares soaring far above their actual values. The crash, said investment analysts, consultants and assorted financial crystal ball gazers, was inevitable. But though painful, there was a silver lining: Punters realized that the market can go down as well as up. Lessons were learned.
But have all Saudi investors learned those lessons?
Possibly not.
The IPO for Emaar EC (Emaar the Economic City), the consortium of UAE development giant Emaar Properties and a number of prominent Saudi investors, saw Saudis in their millions scrambling to buy shares. Whether they were stunned by the size of Burj Dubai, Emaar’s super-skyscraper that will become the world’s tallest building when opened in 2008, or by the ever-growing plans for the massive King Abdullah Economic City at Rabigh, for which Emaar EC is lead developer, Saudi punters were clearly hooked. Over 10 million people, more than half the Saudi population, jumped on the offer; it was oversubscribed by 2.82 times. The SR2.55 billion ($680 million) IPO had 2.8 million applications; the total amount subscribed was SR7.18 billion ($1.91 billion).
As if that wasn’t enough to suggest continued market mania, there was deep disappointment when trading started on Sept. 30. Punters, who had hoped that the SR10 value Emaar shares would be trading at SR100 and more, saw them rise to a mere SR30 to SR40 a share. Their diamond-studded dreams of a 1,000 percent profit were dashed; the reality of a mere 300 percent profit was deemed meager in compensation.
Investment analysts say that many investors live in a fantasy where the stock market converts their dreams of instant wealth to reality. Too many Saudi investors have little understanding of the market, says Jeddah-based economic consultant Ismail Sajini.
“There is no recognized pattern to investor behavior,” he explains. “People are not buying stock for investment, but for trading.” Unlike investors 20 or 30 years ago who looked at the long-term return, people now want instant rewards, he adds. They have not learned any lessons; there is no analytical approach to investment.
This unthinking approach is likely to continue, he believes: “Maybe two, three years. Maybe five.” In the meantime, investors are going to rush into every IPO, he says. Investors, he says, “are not mature yet.” They are “uneducated” about the market. “People still see the stock market as a new gold rush,” he says. They have not acquired stock-market savvy.
But that is not surprising, Sajini says: “Most experts were wrong in their projections (about Saudi shares).”
He blames a combination of factors for the headlong rush into the market: The fact that for so long there were so few opportunities for investment; the ease of the e-Market in the present boom (“Get hold of a computer and you can buy!” notes Sajini); and the authorities’ eager promotion of a share-holding society.
People were swept along by infectious enthusiasm, he says, encouraged by the government’s reforms and the boom. In particular the unemployed, the inexperienced, those in need of money, saw the stock market as a golden goose which could solve their financial problems at a stroke. Sajini likens some of the stock speculators and day traders to gamblers who pin all their hopes on a lottery win, borrowing in the hope of hitting the jackpot. Blindly buying shares in companies that did not make profits, could not make profits or, worse, had been losing money for years, many buyers were willing victims to scams and ramps and were caught in the inevitable crash. They were, Sajini sadly reflects, “losers before and losers afterward.” They still have not learned the lesson, he says. There will be “dummies and crooks in the market until controls are well established,” and until there is a better educated and more intelligent approach toward buying and selling shares. “We’re in a process of maturing,” he says, but it will take time.
Ahmad (not his real name), a senior government employee in Riyadh, concurs with the gambling comparison, albeit from the other side of the fence.
“Our market is just for gambling,” he says. “If you want to invest, put your money in the US market.” Hardly advice with which the Saudi business community would agree.
Ahmad has a healthy salary of over SR30,000 a month. He says that he earns far more than that every month “on gambling on the stock market.” From the moment the Tadawul opens at 11 a.m. till it closes at 3.30 p.m., Ahmad is glued to the computer, monitoring prices online, ready to buy or sell shares at a second’s notice. “There’s no point using the Tadawul website,” he says, “it’s five minutes late.”
Is Ahmad’s attitude typical of the Saudi stock buyer? Yes and no. Yes, in that like others he is clearly star-struck by the stock market, seeing it as the magic door to wealth. No, in that he came out of the crash with a profit. That maybe because he evidently sticks to much the same principle as the late but very rich Calouste Gulbenkian: “You’re selling? I’m buying. You’re buying? I’m selling.” He says simply that he sells when shares rise and buys when they drop. He also studies the market. At home in the evenings, he is on the computer studying company reports, deciding when to move in or out of a stock; he talks share prices to anyone who will listen — to the point of monotony. Emaar will go down, he pontificates: “I will not buy until it drops to below SR20 a share.” Al-Rajhi, he likewise insists, will climb to SR400 before the end of the year.
Basil M. Al-Ghalayini, CEO of BMG Financial Advisors, has a slightly different take on post-crash attitudes. He sees a difference between trading in shares and applying for IPOs to sell at the first opportunity.
He agrees there was a lot of ramping earlier in the year, but, he says, “those who got their fingers burned are not as naive now as they were.” They are now shying away from badly managed and overpriced companies. “They are not the ignorant gamblers they used to be.”
He also sees the size of the stock market having an effect on behavior. With new IPOs now tumbling out of the pipeline, the number of listed companies on Tadawul is going up all the time; at the beginning of 2006 there were 77; by year’s end there will be 85, a healthy 10 percent growth. But by the end of 2007, there will be another 40, he says, a 47 percent growth. That will make an enormous difference, he says. With a much bigger field in which to play, there is far less chance of investor liquidity artificially pushing up prices. And indeed there may even be as many as 60 new listings next year, a staggering 70 percent increase. It is going to be a busy year. All these new listings will, in Al-Ghalayini’s opinion, “deepen and enhance the performance of the stock market.”
However, IPOs are different, he says. People see them as guaranteed money-spinners. “For any IPO you’ll find every Saudi household investing the maximum: For the husband, for the wife, for the kids,” says Al-Ghalayini. Providing that the offer is not too steep.
One reason for the Emaar IPO frenzy, he says, was because the offer was so low, just SR10 a share — and because the new King Abdullah Economic City is seen as being backed by the government and the Saudi Arabian Investment Authority (SAGIA). “The project has credibility,” he says. “People know the shares will never go below the offering price.” That is what had over half the population fascinated by the IPO. He suspects that it will be the same frenzied story with the other economic city IPOs — in fact with most IPOs, providing they are sensibly priced.
Brad Bourland, chief economist at Samba, also talks of a “bifurcated market” — IPOs being one thing, trading another; the former encouraging, the latter cause for concern.
Money has been made from IPOs and will continue to be made, he says; they are almost a means of wealth distribution. “You’ll have made money in every IPO if you bought at the offering price and held on to them, despite the downturn,” he points out. Shares in every IPO since 2003 are still above the offering price. That would not happen elsewhere. In the West, at an IPO, advisers try to sense what it will sell at in the market. If it immediately goes up 300 percent when first traded — often the case with Saudi shares — then they have mispriced. “It is a different dynamic here,” says Bourland. The expectations are of a higher price, and owners, who in any event are owners, are usually selling only 20-30 percent, retaining at least 70 percent of their holding, are happy for that to happen.
The secondary trading market is a different story.
“There’s still a lot of trading in more speculative stocks — in agriculture and services,” he says, adding that, despite the crash, they have had a strong run based on nothing more substantial than rumor. “There is still heavy trading in many companies with weak financial fundamentals.”
Saudi investors are still at an early stage on the learning curve when it comes to market trading, according to Shoura Council member and investment analyst Ihsan Bu-Hulaiga. There are too many involved in short-term trading and not enough in long-term investment, with an eye to dividends and share options. That is the proper approach to the market. But it is not yet there. Investors are a minority, he says. Day trading will always be a part of any market, but the mindset has to mature. There are companies making record profits in billions that are ignored while others, notably in agriculture, that are losing money have been luring investors, interested only in short-term capital gain.
“And short-term here is in hours, not days; they buy in the morning and sell in the afternoon,” says Bu-Hulaiga. The result is that blue chip companies (insurance, banking, telecoms) are under-priced despite enjoying substantial price-to-earning ratios. “The P/E in insurance is six times, in banking 17 times,” he says.
Bu-Hulaiga links the imbalance between short-term trading and investment to the crash; investment analysts, he says, were not surprised when the TASI share index dropped below the 10,000 psychological barrier. The recent “correction” (with the TASI now well below 9,000 and even dropping below 8,000 at one point) will have to continue. If it does not, there will be a new corrective phase, he says, which will presumably again prove painful for unthinking market players.
How long before the market stabilizes? That depends on a balance being reached between trading and investment, says Bu-Hulaiga. But he is relatively optimistic. “The market will be healthy again by the end of the first quarter 2007.”