Saudi stock market builds for possible recovery

The Tadawul All-Share Index has been hovering around 11,000 to 11,500 points in recent weeks and some analysts are hoping to see levels approaching 13,000 by year end following a peak 20,634 points at the end of February.

While volatility continues there are signs that there is a broad consolidation in prices. There is ample reason for optimism given the solid economic fundamentals underpinning the Saudi economy not least far reaching economic reforms as well as surging oil revenues.

Trading as well has been boosted by an increasing number of initial public offerings with dozens more due over the next year. One of the largest in 2006 has been that of Emaar Economic City (EEC) which successfully floated 30 per cent of its $2.27 billion share capital in August.

ECC oversubscribed

The IPO for EEC, which is developing the $27 billion King Abdullah Economic City project, was oversubscribed 2.82 times. Read Sea Housing Services' IPO also closed in August five times oversubscribed.

Analysts expect a similarly enthusiastic response when Saudi International Petrochemical Company (Sipchem) comes to market. Sipchem is offering 30 per cent of its share capital valued at $660 million in one of the Kingdom's biggest ever flotations.

Another boost is likely to come from Saudi Real Estate Company's IPO which closes on October 4. An IPO for one of Saudi Arabia's biggest retail distributors, Fawaz Abdulaziz Alhokair Group, is also due to take place in the same month.

Overall stock market turnover in 2006 is expected to reach $1.7 trillion which is good news for brokerage houses and banks which provide most Saudis with their share trading opportunities.

IPO pipeline grows

Other major companies are due to come to market. 2007 including Prince Al Waleed bin Talal's Kingdom Holding Company, Saudi Arabian Mining Company and Saudi Arabian Airlines. The recently formed Inmaa Bank is also planning to offer 70 per cent of its share capital in what will be the Saudi Arabia's largest ever flotation.

However, even though the index had been boosted by initial public offerings the exchange still lists less than 100 stocks. In addition to a lack of depth, a major problem exacerbating the corrections in 2006 has been senseless speculation by smaller investors in hugely overpriced smaller companies

Like earthquakes there are few warnings of a stock market crash but there are often indications of markets overheating and bubbles do eventually burst. This was illustrated graphically earlier as the rising price earnings ratios of equities in the Saudi stock market and in other bourses in the region seemed to defy gravity.

The results more akin to a collapse than a correction are still being felt in the GCC where stock markets are still developing and investors learning the hard way that prices move down as well as up.