Financial analysts have attributed the drop to widespread profit taking triggered by moves on Saudi Electricity Company (SEC) stock. 'The market started selling [SEC] and this led to profit taking across the board,' says a Riyadh-based financial analyst.

The developments come on the back of a six-month equities surge. The TASI index has jumped from record high to record high since 15 March, reaching 4,477.34 points on 14 September, rising 78 per cent.

'I would have expected the correction even earlier,' says Muhammad Younas Malick, chief economist at Jeddah-based National Commercial Bank (NCB). 'The fear of profit taking was emerging but there is no fundamental weakness in the market. I think the announcement of third-quarter earnings will tell the real story.'

The performances of listed Saudi companies have been strong in the first six months of the year and this trend is not expected to change. According to an NCB survey of 51 leading companies, which have a combined market share of 98.2 per cent, full-year profits will increase 52.2 per cent to SR 29,110 million.

The largest profit maker during the first half was Saudi Telecom, which posted net profits of SR 4,149 million, up 218 per cent on the same period in 2002. Boosted by cost-cutting measures, the company is expected to post full-year profits of more than SR 8,000 million. The positive performance has been reflected in Saudi Telecom's share price, which has soared 130 per cent since it began trading in February. With a market capitalisation of SR 17,900 million, or 21.3 per cent, Saudi Telecom has become the largest listed company and its shares have been a key factor behind the TASI's recent ascent.

While a number of local companies have been posting strong interims, much of the market boom has been liquidity-driven. 'There is a lot of liquidity around that is looking for a home,' says another Riyadh-based analyst. 'But many find only one home for it and that is the local stock market, because of fears that the money could be frozen outside the country.'

While analysts say that it is difficult to predict how the market will play out over the next few weeks, the indications are that strong liquidity, consistently high oil prices and further progress on the economic reform front will ensure that the stock market has only a limited downside. Says a Riyadh-based analyst: 'We expect a few more corrections but nothing dramatic.'

Exchange rate: $1=SR 3.75