The Saudi share market is big business for the kingdom's commercial banks. A tour of any bank head office in Riyadh or Jeddah reveals rooms set aside for private clients who can track the market on large overhead screens, consult an array of personal computers for more detail and simply reach for the phone to broker deals. The cosseted atmosphere can be more akin to a private club than the cut throat world of the trading floor.

The scale of the Saudi share market merits the attention. At the end of 1994, the market capitalisation was $39,000 million, larger than most of the Arab markets put together. The value of shares traded accounted for about 50 per cent of the total trading in all Arab countries.

Freefall

But on the basis of performance over the past 18 months Saudi bankers would be forgiven for wondering if the huge outlays on such fine trading facilities were such a smart investment after all. Since January 1994, the market has lost more than 40 per cent of its value and the main share index is too close to the 100-mark for comfort. This is a far cry from the historic high of April 1992 when the index reached 234.

To the many investors who poured money into stocks and shares in the wake of the Kuwait crisis in 1991, the collapse in share values has come as a shock. Even the experts who track the market are lost for ways of trying to get it back up to its previous levels.

Few would criticise the basic trading mechanism. There is no official stock exchange, nor is there a trading floor. Instead, shares are traded through a sophisticated electronic network which can be accessed using 500 outlets operated by the kingdom's 12 commercial banks. Brokerage houses have to register all deals through the banks. The electronic securities information system (ESIS) is screen based, which offers display terminals (ESIS-LINE) and order placement terminals (ESIS-NET).

The method of buying or selling shares is straightforward. Trading is in two daily sessions from 10.00 am to noon and again from 4.30-6.30 pm. The evening sessions sometimes extends to 7.00 pm. An order can be made at ESIS-NET terminals anywhere in the kingdom, from where it is sent down the line to the head office of a bank and on to an order matching and execution service. Once the order is matched, a cash placement can be made and the deal is registered electronically with the Saudi Share Registration Company. The share movements are monitored by the National Center for Financial & Economic Information (NCFEI), a department of the Finance & National Economy Ministry, which issues an index on a daily basis.

Each transaction is also recorded by the Saudi Arabian Monetary Authority (SAMA - central bank), which regulates the market. SAMA monitors the movement in prices, and will freeze trading in any stock that fluctuates by more than 10 per cent in a single day.

Such monitoring has not prevented shares from recording extreme price variations. One Riyadh-based consultant points to the wide fluctuation in the share price of Saudi Hollandi Bank, which in four weeks in January was the best and worst performer over consecutive weeks, based on little or no market news. He says this is true for many companies which have a large number of shares concentrated in the hands of a few investors. In Saudi Hollandi's case, this is the Al-Mawarid Group.

In addition, a disproportionate amount of the market capitalisation is accounted for by the 10 largest companies. In 1993, the top 10 firms accounted for almost 60 per cent of market capitalisation. This compares with between 15-25 per cent for developed markets such as the UK and US, and about 30 per cent for other emerging markets such as Brazil and Mexico.

'The market can be manipulated because there is a small number of companies and some very big players who are able to move the share price,' says one Riyadh banker. 'The average Saudi punter simply follows the big shareholders.' He suggests that more companies should be encouraged to list or raise private capital through the exchange which would broaden the shareholder base and dilute the impact of the big players.

But new companies looking to raise capital through share issues see a deeply depressed market, with little enthusiasm for new shares. The last new issue in a public stock company - the Tabuk Cement Company share offer - was completed more than a year ago in mid-April 1994.

Even rights issues are not easy. Bank Al Jazira's issue last December was the first to be underwritten on the Saudi share market - in this case by the Al-Rashid Group which is already a major shareholder in the bank. In the event, due to lack of interest in the offer, Al-Rashid found itself taking up 90 per cent of the new stock. Bank Al Jazira's record of past financial difficulties did not recommend the new offer to prospective investors. But some analysts say it has cast a shadow over the market with the prospect of share dumping by Al-Rashid, which could push the market down further.

Privatisation is seen as one way to broaden the shareholder base. But the authorities have remained tight lipped on this issue, exasperating many investors who are keen to see steps taken to revive the flagging bourse. 'The measures being introduced to try to facilitate trading at the moment are like rearranging deck chairs on the Titanic,' says the Riyadh consultant.

But the cautious approach is not without its supporters who say SAMA and the Commerce Ministry are simply not prepared to develop the market at any price. 'If you liberalise for the sake of liberalisation, that would really be a disaster,' says the head of investment at one of the kingdom's leading banks.

He says the present difficulties are mainly a reflection of the overheating of the early 1990s, and the drop in value was simply a necessary correction. And he adds that most shares are now undervalued, offering some excellent buying opportunities. Saudi Basic Industries Corporation (Sabic) is the most frequently quoted example. Shares are now trading at around SR 300 ($80). But Sabic is one of the world's most profitable petrochemical companies and traders say a share price of SR 400-500 ($107-133) would be a more realistic valuation.

The impression created by the price fluctuations may also be exaggerated, according to the investment banker. 'When you talk about volatility, you are talking about one or two stocks, which is no different from other emerging markets,' he says.

In spite of its size, Saudi Arabia is a young and developing market which, even the critics concede, make it a market worth watching. Peter Bennett, of Bennett Capital Management and manager one of the few emerging market funds to include Middle East stocks, is keen to promote the potential that the Saudi market offers to international investors.

But there are snags. 'I think from an investors' point of view, they are not going to find the Middle East an attractive market until one big market opens up - and that's Saudi Arabia.'

EB