The Saudi stock market seems to be on a more even keel in the second half of this year, but investor confidence has some way to go before stability is assured. The actions taken by the Saudi Capital Market Authority (CMA), the stock market regulator, have started paying dividends as the market slowly but steadily moves up.
Apart from CMA measures, external factors and geopolitical issues have also played a role along with the continued rise in oil prices and the uncertainty of the health of foreign financial institutions due to the US subprime market crisis.
The gradual rise of the Tadawul All-Share Index (TASI) to above 9,000 after languishing around 7,500-8,000 for most of the first half of this year is more a reaction to events rather than a sustained investor turnaround.
To bring back investor confidence, the CMA tracked down illegal share manipulators and punished them by deterrent measures. The CMA took actions at the end of June against two investors and two intermediaries for violating the Kingdom’s stock market regulations and fined them a total of SR410,000. It was not much compared to the losses suffered by many, but it was an important warning shot.
The market also got a boost in September from CMA’s decision to lift the remaining restrictions on GCC citizens trading in the stock market. Citizens of Kuwait, Qatar, Bahrain, Oman and the UAE had been allowed to invest in Saudi stocks, except for banks and other financial services. That has now changed.
Saudi Arabia still forbids other foreigners, except those who reside in the Kingdom, from investing directly in the market, though they can invest in mutual funds.
The stock market implemented a new trading system in October which is designed to accommodate about two million deals daily, with prospects of increasing the capacity to meet future requirement. Dr. Mohamed Ramady, professor of finance and economics, King Fahd University of Petroleum and Minerals, said that the introduction of the Nordic OMX exchange system helped to reassure investors after a jittery start.
“Among the technical enhancements of the OMX system was its ability to boost the capacity of processing trades to two million transactions per day from levels of under one million before its introduction. More significantly, OMX created the ability to process different types of orders: market, limit and hidden orders. The last were the ones that had caused most concern, whereby hidden large orders, if transacted, could distort the market price. Now mega orders are executed in tranches to enable the CMA gauge the effect on the rest of trades. The result was positive as market trade volumes rose by over 10 percent over a month and smaller investors seemed to feel more confident in this transparency move by the CMA,” Ramady said.
SABB Chief Economist Dr. John Sfakianakis told Arab News: “The stock market, especially since the Eid Al-Fitr holidays, has been on an upswing. There are a number of factors that have helped the market to pick up in recent weeks. The restoration of positive earnings momentum in Q3 on a year-on-year basis is one of them. So far, earnings growth (y-o-y) has reached 8.7 percent compared to Q3 2006. The banking sector has performed better but still remained negative -6.3 percent, but better than Q2’s -32 percent. Industrial earnings have been strong, so far up 22.9 percent, led by Saudi Basic Industries Corp. (SABIC) and Saudi Arabia Fertilizers Co. (SAFCO). The strongest momentum is in cement +29 percent, due to the strong growth in construction.”
Sfakianakis said: “Robust economic growth is an indication of strong corporate performance. The local stock market is deepening, as more companies are publicly traded and the trend is set to continue. The market has grown this year by more than 16 percent and that is healthy sign. However, the macroeconomic story, which is a robust story, should be taken out of proportion and should lead to the pre-February 2006 exuberance. Volatility is found in all emerging markets and the Saudi market is not dissimilar in that way. The Saudi market has undergone changes. GCC investors can invest in Saudi Arabia and that is changing the profile and outreach of the stock market. By opening up the market to, for the moment, GCC investors, institutional participation is growing, albeit from a low base. Greater institutional participation will eventually bring positive changes to the corporate profile within the Kingdom, just as the World Trade Organization (WTO) brought about monumental changes in the goods and services sector in the country.”
He added: “Retrospectively, the crash of 2006 was unavoidable. But after the fact, many claim that they knew of an impending crash. The crash has taught important lessons — at the state, corporate and personal level. Macroeconomically, the crash of 2006 did not have a severe impact. Corporates and individual investors are coming to grips with the crash and adjust accordingly. We are still in the adjustment phase for both corporates and investors but more so for those in the latter category than in the former.”
There is a major development in the insurance sector this year. Tawuniya, formerly the Company for Cooperative Insurance, was the only dominant insurance company until recently, but now there are 15 companies in this sector.
Basil M. Al-Ghalayini, CEO of BMG Financial Advisors, said: “The stock market is gaining more and more confidence gradually in the later half of this year although the newly listed insurance companies are not increasing the market cap of the index. However, it is healthy to have more listed companies in the market.”
Al-Ghalayini added “insurance companies are not making more than two percent of the market cap so they are not affecting the market. However, the recent increases in the stock prices of the insurance companies are the indication of the speculators’ interest in the insurance sector irrespective of the fundamentals of these companies.”
According to a Tadawul report, the market capitalization at the end of the first nine months of this year declined by 22.5 percent over the same period of the previous year to hit SR1.330 trillion ($354.62 billion).
The total value of shares traded for the first nine months was SR2 trillion ($534.48 billion), a drop of just under 56 percent over the same period of the previous year. The total number of shares traded fell 24.6 percent to 44.72 billion for the first nine months as compared to 59.30 billion shares for the same period of the previous year.
The report said the total number of transactions executed during the first nine months dropped by 30.4 percent to 53.41 million as compared to 76.73 million trades for the same period of the previous year.
The number of trading days during the first nine months was 191 against 206 during the first nine months of 2006.
The total number of companies was 104 at the end of September.