The simplest reason for the revival of the market has been the return of investor confidence. The stock market crash of 2006, when the TASI plunged from almost 21,000 to below 8,000, followed by the global financial crisis, which took the TASI down to just over 4,000, decimated the confidence of investors. Although the TASI rose in recent years, investor enthusiasm was low, with daily volumes around one-tenth of what they were at the peak of the market.
In contrast, the current rally has occurred amid high volumes suggesting that investors are returning to the market seriously. The total value of shares traded peaked at SR21.6 billion on March 19, the highest since March 2007, and has been above SR10 billion every day since Feb. 19. This compares to a daily average of SR4.4 billion in 2011 and SR3 billion in 2010. Furthermore, an increasing number of dormant brokerage accounts are being reactivated, the Jadwa report said.
Another indicator of the shift in investor sentiment was the jump in price in the first day of trading for the two companies that listed during February. The share price of plastic packaging company Takween jumped by 125 percent on listing, while that of Saudi Enaya Cooperative Insurance surged by 267 percent. During the market's boom years exceptionally high first-day gains were common. While these have occurred occasionally with some subsequent insurance company listings, the companies were very small. Takween was the first new listing of over SR100 million to record triple-digit first-day growth since Basic Chemical Industries in the first half of 2008; Saudi Enaya also raised over SR100 million.
According to Jadwa, combination of local, regional and global factors have caused the revival in confidence that has lifted the TASI so far this year:
Valuations
Over the past couple of years company earnings and their share prices have been disconnected. Earnings have been strong, with net income rising by 36 percent in 2010 and by 21 percent in 2011, but the TASI was up by only 8 percent in 2010 and fell by 3 percent last year. As a result, the price-to-earnings ratio of the market was below 12 for much of the final quarter of last year, a level previously only seen at the depths of the financial crisis in late 2008 and early 2009.
Land prices
With interest rates exceptionally low, shares and real estate or raw land are the main opportunities open to local investors. Given disappointment with the performance of the equity market and a serious shortfall of housing, there has been much investment in land in recent years. However, by late last year many investors felt that land prices were too high and set to fall, prompting a shift of funds from land into the stock market. Growing concerns about land prices and the rise of the TASI have added further momentum to the portfolio adjustment.
Margin lending
Local banks have resumed offering margin lending. This practice, under which investors can borrow against unrealized gains in stock market portfolios, was an important driver of the market through 2004 and 2005. Now, banks are requiring much greater collateral than before. The revival in margin lending may reflect the improved confidence of banks in the stock market as well as the large amount of spare funds banks have on their balance sheets.
Foreign access
Regulators have indicated that a further opening of the stock market to foreign investors may take place this year. Various administrative steps to support this process have occurred. Saudi Arabia is an important market and contains stocks that many foreign investors would want to own. Foreign participation has already increased. Foreigners bought SR2.6 billion of shares in February, compared to a monthly average of SR1.1 billion in 2011. Some investors may be anticipating an immediate inflow of large amounts of foreign money once the market is opened further, though this may not be the case.
Economic outlook
Recent economic data has been strong. According to Jadwa, nonoil economic growth for 2011 was at a 30-year high and data for January and February shows that the momentum has been maintained into 2012. New project announcements suggest that government spending is being stepped up at the same time as high oil prices and production are adding to government revenues.
