The talk of the town right now is whether the stock market is overvalued and whether the real estate market is on the verge of collapse.
Although no one has a crystal ball to predict the future accurately, both markets are interrelated, yet currently moving in different directions.
The stock market has risen around 18 percent to 7,600 points since the beginning of 2012 with an average daily trading value of SR 12 billion.
Observers argue that the run-up in stock prices has a long way to go since the index remains far below its highest point of 20,536 in February 2006.
Looking back, we can see that this was a bubble created by unrestrained optimism and did not reflect the intrinsic value of publicly traded securities. Compared with its historic high, the market now appears to be in a slump.
When one takes an average of the highest and lowest index prices in a year 5,795 (i.e. middle 13,166 points), the index is still below the average by 42 percent. But is this a bad thing?
Actually, stock prices are very low and attractive.
If we also consider the P/E ratio of 13, we can see that the valuations in the Saudi stock market compares quite favorably to 19 back in 2005.
Further, a P/E ratio of 13 and yield to dividend 3.71 percent is quite attractive when compared to other emerging stock markets.
In terms of turnover and trades, some people may believe that it is high when the traded value varies from SR 9 to SR 20 billion daily.
But this is not true, because the value includes all trades when, in reality, the indicative value is just the half that number, i.e., between SR 4.5 and SR 10 billion.
Stock market volume can be turnover amounts or change in portfolio asset allocations, still quite low.
Also, if we compare traded value with overall market value, we find that it is only 87 percent versus 430 percent in 2006 when the index reaches its highest point.
Therefore, the current value of the Saudi stock market is below its median, and with low P/E ratios and trading volume, it has a long way to go in order to attain the median before we can say there is a bubble.
By contrast, the Saudi real estate market has experienced severe declines, as much as a 30-40 percent drops in some areas of the country.
Now, people are warning of a complete collapse in the real estate market, which has caused many to move their money out of real estate and into the stock market.
Again, this is not true and we can even say that there is an unjustifiable misconception.
Of course, some hesitancy is understandable in view of recent price corrections and the experience of certain speculators.
However, one must remember that the total value of the real estate market is more than SR 2 trillion, which cannot be easily affected by the exodus of 10 billion moving into the stock market.
If we assume that the daily traded value of the stock market is SR 10 billion and if we consider that the government has pledged to inject SR 250 billion over the next five years, we can see that the net effect is positive for real estate investments.
The amounts entering the real estate market (cash inflow) is far greater than the amount leaving the market (cash outflow).
We are simply experiencing a temporary price correction and market cool down.
As the population grows, more and more real estate projects will be required to provide housing and commercial goods for Saudis.
The Ministry of Housing has allocated SR 250 billion for real estate projects over the next five years.
There also is a real estate fund of SR 40 billion set aside for loans as well as many new regulations like the mortgage law in the pipeline.
All these factors will invariably cause an increase in real estate prices and more real estate development rather than real estate speculations in many places, especially the recession-proof ones like Makkah and Madinah.
Finally, the Kingdom is enjoying an economic boom with more than SR 2 trillion in reserves, which will positively affect both the stock market and the real estate market.
The current economic trend confounds the assumption, which says that if the stock market flourishes, the real estate market will collapse and vice-versa.
In fact, both markets are experiencing unprecedented growth and investors have become more knowledgeable today as compared with the pre-2006 period. Investors now know how important it is to diversify their investments and invest for the long term, not for the short-term gain.
We must thank Almighty Allah for the wellbeing that Saudi Arabia currently enjoys, which seeks to bring prosperity to all its citizens.
Sami Al-Nwaisir is chairman of the board
Al-Sami Holding Group. [email protected]
Saudi stock and real estate markets: What's going on?
