Volatile TASI bouncing back

25 June 2004
The Saudi Arabian stock exchange has been hit by severe volatility in the past four weeks,with the 29 May terrorist attacks in Al-Khobar a key factor. The Tadawul All-Share Index (TASI) rose to an all-time high of 6,346.03 points on 17 May before being hit by the biggest-ever weekly retreat, leading the market to fall by more than 15 per cent to 5,114.05 points on 27 May. Since then a recovery has been staged, driven by high liquidity, sound market fundamentals and robust macroeconomic indicators: the TASI was back up to about 5,500 by mid-June. Despite the correction, overall market gains are still 27 per cent up for the year.

'Some of the investors felt that they had achieved their targets and that the market cannot go much further and therefore decided to pull out,' says Said al-Sheikh, chief economist at National Commercial Bank (NCB). 'By doing so they affected the sentiment and momentum of the market. At the same time, there has been speculation, in particular in the agriculture and services sectors, where trading values compared with the sectors' market capitalisation have seen high multiples. This suggests that a lot of speculation took place.'

Overall share prices in the agriculture and services sectors fell by 38 per cent and 26 per cent respectively in late May. Among the largest hit stocks was Saudi Electricity Company (SEC), which accounts for 12 per cent of total market capitalisation and has long been considered to be overvalued. SEC saw its value drop by 37 per cent in the week ending 27 May. Highly profitable sectors such as cement, banking and telecommunications on the other hand saw comparatively small decreases of up to 11 per cent.

'This week was the biggest-ever weekly decline of the Saudi stock market, but it is noticeable to see the big divergence of stocks performances, thus reflecting investors' awareness and recognition between investment grade and speculative stocks,' said a report on the week ending 27 May by the local Bakheet Financial Advisers. 'Speculative stocks continue to be volatile, while companies with fair investment valuation based on their financial positions will be steady as investors are awaiting second-quarter financial results.'

Despite the latest volatility, most analysts remain optimistic about the market's near-term outlook. 'Saudi Arabia's positive macroeconomic performance, low interest rates, high liquidity and strong company performances have kept the market in good shape and - I think - will keep it in good shape,' says Al-Sheikh.

Analysts and investors alike are now awaiting the implementation of the new capital markets law and the appointment of the regulatory body. The long delays are widely regarded as having held back a number of major initial public offerings (IPOs) on the local market. The heavily oversubscribed SR 300 million ($80 million) IPO of Sahara Petrochemical Companyin early June offered fresh evidence of the pent-up demand for new scrip.

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