Driving the market in the immediate term is the expectation and release of third-quarter financial results from local blue-chips. Several of the banks have published nine-month figures, with Al-Rajhi Banking & Investment Corporationand Samba Financial Groupreporting year-on-year profit increases of 82 per cent and 58 per cent respectively. However, as the latest report from Bakheet Financial Advisors (BFA)points out, when looked at in comparison to second-quarter growth, the results are considerably weaker, pointing to a broader trend. 'Corporates continue to publish year-on-year comparisons of profits, which of course appear spectacular because we are in a bubble environment,' says Louis. 'But when looked at from quarter to quarter, corporate earnings growth is slowing.'

Market watchers are unanimous in advising investors to take a breather. 'PE [price/earnings] ratios have surpassed 30 and a correction is needed,' says BFA managing partner Beshr Bakheet. 'A correction has been overdue for the past year,' says Louis. 'However, we are talking about a very narrow, poorly researched market - one in which the entirety of shares in some of the smaller listed firms can change hands in a single day.'

A development that would help take some of the heat out of the secondary market would be a pick-up in primary market activity. Several petrochemicals project companies are due to be partly sold off through initial public offerings (IPOs), in accordance with recent government guidelines. At some point, the newly licensed foreign insurance providers are due to stage share sales, although there is talk of the original rules being relaxed. Several family businesses have announced plans to go public. However, in spite of the ever-lengthening pipeline of IPOs, few have materialised and the timing of the next to hit the market is uncertain.

On the one hand, it takes time to prepare companies for public sale. On the other, the regulatory regime remains in its infancy. 'The CMA [Capital Market Authority] rules are far from clear on the process of staging an IPO - the degree of due diligence and public research, the responsibilities of issuers,' says one analyst. 'The authority is short of resources and there is an impression that more energy has been devoted to introducing better discipline into the secondary market than to developing the primary market.' The CMA has won plaudits for its improved policing of the bourse, suspending traders engaging in activities such as insider trading. 'The outlook for the kingdom's stock market is positive, although I don't see the market going up by anything like 80 per cent in 2006,' says Louis. 'However, affordability of stocks could become a real problem for retail investors, which is likely to lead to an accelerated move into mutual funds or a shift of investment to elsewhere in the GCC, where regulation is less onerous and stocks are perceived as being cheaper.'

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