Investment moves help rally stock market nerves

The precipitate fall in share values belies underlying financial conditions in Saudi Arabia. The country's finances are at their healthiest in more than 20 years. The Saudi economy, which grew 6.5 percent in 2005, recorded a record current account surplus of $87 billion.

Companies and banks too have been reporting substantial increases in profits and increased dividends. First quarter company and bank results this year are expected to underline this trend.

Prince Alwaleed's promise

Prince Alwaleed bin Talal, chairman of Kingdom Holding has helped stabilise confidence in the faltering stock market with an announcement that his company plans to invest at least $1.3 billion, and perhaps double this amount, in Saudi stocks.

He also announced his intention to float 30 per cent of Kingdom Holding shares in an IPO on the Saudi bourse later on this year. This will add to the more than 30 initial public offerings which are expected to be introduced to the Saudi bourse, most of them in the next 12 months.

Another confidence building measure is the likely authorisation for expatriates to invest in the Saudi stock market This helped the index gain 9.54 per cent in two days of trading by March 17.

Expatriate opening

Some 7 million foreigners work and live in the Kingdom and even if only a small percentage of these became investors observers believe it would have a strong impact on the market.

Prince Alwaleed, a leading international investor, has blamed the Saudi market's dramatic fall on a 'speculative bubble' resulting from the actions of a group of 'unscrupulous investors.' He claims speculators exaggerated the prices of stocks in companies some of which had never recorded a profit.

The fact that there are only 78 stocks to buy makes the Saudi market thin in spite of the colossal amount of funds seeking investment opportunities thereby making the market very vulnerable to sudden extreme swings.

If more stocks were available to the wider public this could also help prevent the pursuit of too few stocks. Huge amounts of capital chasing such a small number of shares has the added danger of creating unrealistic price levels for companies that do not have the balance sheets to justify their valuations.

There have also been calls for market makers to be created to buy and sell as needed to stabilise the market and stop the market oscillating wildly between peaks and troughs. The Saudi Public Investment Fund has been suggested as one such candidate.

But for those who imagined the stock market was an unending opportunity of one short-term gain after another, the last few weeks have been a harsh but arguably necessary lesson in investment.