Time to deliver, say investors

16 September 2005
The Saudi stock market continues its inexorable rise, with the Tadawul All-Share Index (TASI) up by more than 70 per cent since the start of the year. But analysts are increasingly warning of the irrational impetus behind the market's twists and turns. And complaints are being heard widely about the pace of concrete reform of the kingdom's capital market, behind the well-intentioned policy headlines.

The stock market underwent a correction in July but has since continued its upward course, for no apparent reason other than the easing of anxiety prevailing during King Fahd's illness about the smoothness of the succession process. 'Movement in the market is totally irrational and purely speculative,' says Eric Louis of Banque Saudi Fransi. 'The base of listed companies is very narrow and there are no proper disclosure rules. We have a situation where the entirety of a listed company's shares sometimes changes hands in one day.' The weekly report from Bakheet Financial Adviserspublished on 25 August sends a similar message. 'The Saudi stock market continued breaking new records amid the non-existence of positive factors for many listed companies, especially speculative ones which registered sharp gains during the week where the index set a new all-time high of 14,833.69 points driven mainly by a rise of 6.5 per cent by Sabic [Saudi Basic Industries Corporation].' The rise has left the price/earnings (PE) ratio for the market as a whole standing at about 36.

Amid the soaring share prices, the banking and - particularly surprisingly - the cement sectors have underperformed. 'Not too much should be read into the banking movements, because the stocks are illiquid so small trading volumes can move prices. BankAlbilad has maintained its price in spite of the fact that the management recently said that they didn't expect a positive bottom line for at least two years, and is currently looking overvalued,' says a Riyadh-based analyst. 'The cement sector performance is more puzzling, because the new king recently announced SR 8,000 million [$2,133 million] would be allocated for new housing for the poor and a SR 9,000 million [$2,400 million] increase in the size of the real estate fund. People may be worried that there will soon be a surplus with all the cement plant projects on the horizon.'

Some of the smaller stocks are looking attractive. Saudi Arabian Public Transport Company (Saptco) has done well after recently picking up a licence to transport sand to Bahrain. 'The industry sector in general is a good bet going forward, and glass company Zujajand National Gas & Industrialisation Companyin particular are attractive - small, well managed companies,' says the analyst.

Complaints remain widespread about the regulation of the market. 'The CMA [Capital Market Authority] has good intentions but the practice is less positive,' says Louis. 'The whole area of asset management is completely unregulated and although there is talk of multiple IPOs [initial public offerings] in the pipeline, the number of IPOs that have actually taken place in the last nine months is minimal. The CMA issued its brokerage regulations in July but more detailed guidelines are needed.'

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