Saudi shares drop on privatization fears

Stock markets do not always behave as governments would like, and the Saudi authorities must be nervously eyeing the reaction of the market last week to the government announcement that it will be selling shares in a number of state concerns.

Last week the Tadawul All-Shares Index fell 1.5% to close at 2,815.73 points, though still up 15.9% on the year.

Investors have clearly reasoned that if the stock market is flooded with new shares, then prices will fall. This annoyed market analysts who believe the reverse will be the case, as a greater supply of shares will encourage more investors into the market, improve liquidity, and boost share prices.

Who is right? Well investors call all the shots in any stock market. So right or wrong, the market will decline due to privatization if that is the way investors choose to see it.

But the brokers are right. If Saudi Arabia wants to have a liquid and efficient stock market then it needs more shares in issue. At the moment it can be difficult to trade larger blocks of shares because the market is so small, that will change if privatization moves ahead.

On the other hand, the Saudi authorities must learn to be sensitive to the mood swings of investors, and not just rush ahead with privatization. For if an early privatization issue was to fail, then that would be the end of the game. Market judgment is as much about sensitivity to investors as rational assessment.

Perhaps after this week, the authorities will think again about how much the market can handle in the way of new issues. The sensible thing would be to give investors few shares, and let them make a lot of money, in the first few privatizations, and therefore attract new investors into the marketplace. There is no point in scaring them all away from the outset, which is what seemed to be happening last week.