Saudi market hits record high
THE SAUDI ARABIAN Tadawul stock market is celebrating an all-time record with share values hitting a staggering US$535 billion. Ongoing increases in oil prices, coupled with steady economic growth and low indicators, have sparked the recent dramatic increases.
Observers say investor sentiment in Saudi Arabia has changed significantly over the past several years — ignited at first out of the culture of both fear and intense scrutiny that came in the aftermath of the September 11 attacks in the United States — as part of a global effort to crack down on money laundering and dubious financial activities.
But trepidation is no longer the underlying factor for investors who have largely kept their money in Arab markets and at home in Saudi Arabia. Sluggish performance of western indices has contributed to an inward investment approach, according to industry insiders.
“Certainly oil prices reflect business sentiment and confidence in the economy,” explained Said Al-Shaikh, chief economist at National Commercial Bank (NCB), the largest bank in the kingdom. “Oil prices translate into revenues to the government and accordingly there will be growth in liquidity in the monetary system,” he told Arabian Business.
Cash liquidity like elsewhere in the world has been influencing the behaviour of the Saudi market, increasing the appetite of investors and creating demand for stocks. The massive injection of cash, as a result of higher oil prices and its knock-on effect on the Saudi monetary system has taken many by surprise as have the skyrocketing valuations of some companies in areas of the stock market.
Saudi Telecom, for example, has a market capitalisation of US$74 billion, which is larger than the combined value of British Telecom (US$35 billion), America’s AT&T (US$15 billion), South Korea’s SK Telecom (US$15 billion) and South Africa’s Telekom SA (US$9 billion).
Other elements driving the growth, according to Al Shaikh, include the economic performance of the Saudi economy that has been growing at an impressive rate of 6%-7%. The sustainable growth rate has increased demand for goods and services and in turn the profitability and appeal of Saudi companies.
“In the last couple of years we are seeing year on year [company] growth above 40%. In 2004 it was 46% and in 2003 was 63%,” says Al Shaikh, adding, in 2005 profits are expected to rise and additional 25%-30% over last year’s profits. “This is tied to the fundamental side of the market, and not only the performance of the economy, but in terms of profitability of companies and the improvement of the financial indicators of the company,” explained NCB's Al Shaikh.
The fact that the European and US markets have been under-performing has influenced investors to keep their wealth in local stocks. Even mutual funds, which represent a small percentage of the overall market capitalisation of the Saudi market, are growing.
“Arabs are definitely looking inwards when it comes to investing because global markets have slumped into performance for the last few years not to mention the war on terror. Those are two factors that scare Arab investors to go overseas,” said Bisher Bakheet, head of Bakheet Financial Advisors (BFA).
Still, it is hard to gauge how much of Arab wealth that was previously abroad has been repatriated to the region. “There are no hard facts. Unfortunately even in the two most transparent countries, the UK and the US no one can determine how much US citizens own in the UK and how much British citizens own in the US. There is no data to capture it. It’s very difficult,” explained Bakheet.
Though Japanese investment bank Nomura raised alarm bells earlier this summer, when it issued a report saying a correction in some of the Gulf markets was on the horizon and would be “both sharp and painful,” Al Shaikh of NCB doesn’t believe that is the case.
“At this point of time with the price of oil at US$65 a barrel, growth of liquidity in the system, profitability at this level, I don’t see a major correction. There will be some volatility in the market between 1000 to 2000 points but nothing like the market going down 30%.”
In the meantime, market watchers are eagerly anticptaing the upcoming public offering of Saudi Research and Marketing Group, by some estimates a $500,000 million company, that may see its worth increase two fold.