Between July and September 2014, the Saudi stock market (Tadawul) experienced some “irrational exuberance” driven by the announcement effect of allowing foreign institutional investors to trade in the local market.
The decision which is yet to come to effect led to a persistent and rapid increase in stock prices that propelled the main index up by over 30 percent by late September, breaching the 10,000 point mark for the first time in six years. However, the turn of events thereafter, which included a strengthening US dollar and falling oil prices, embroiled the Saudi stock market with speculation and heightened volatility, resulting in the TASI index ending the year at 8,333.3 at a 2.4 percent annualized loss, according to a report by the National Commercial Bank.
The Tadawul All-Share Index dropped 1.14 percent to 9,300.2 points on Thursday.
Although the correlation between oil prices and the TASI benchmark in recent years has been shown to be low, major trends in the oil market do impact individual investors’ sentiments, most of which tend to hold short positions.
Moving on to 2015, reports on declining US tight oil excavation rigs to a 3-year low are signaling that the oversupply scenario for oil might not become prolonged, and that oil prices have bottomed out.
The unchanged oil production policy in the Kingdom reaffirms that an oil price rebound is likely to be seen in 2015. In addition, lower valuations are increasing stocks’ attractiveness to investors, with a price-to-earnings ratio around 14 which may help further decoupling the $511.7 billion market from the oil market, the NCB report said.
At the end of January, 2015, TASI closed at a level of 8,878.5, advancing over the previous month by 6.5 percent. The total value of shares traded that month reached SR162.5 billion, decreasing by 20 percent M/M while the total number of shares traded reached 6.7 billion, retracting by 12.9 percent M/M. Although the market is still bearish, financial services and petrochemicals, which respectively constitute 18.1 percent and 11.7 percent of the market share led the strong rebound, receiving SR29.5 billion and SR19.1 billion.
While the opening and inclusion of Tadawul into the MSCI could raise the risk of stock over-pricing, the role of the foreign institutional investors whom the CMA (Capital Market Authority) will be granting direct access to the Saudi Stock Exchange is to provide more stability via longer investment horizons.
According to the CMA, retail investors reached 4.4 million by mid-2014, holding over a third of listed shares by value. With such a relatively large proportion of traded volumes held by individual investors, the stock market becomes ever more volatile due to the risk-taking nature of individuals and shorter investment horizons. Hence why the CMA only approved institutional investors as it aims to stabilize the market rather than seek capital injections and raise market capitalization. Opening up the domestic market will reduce the likelihood of irrational exuberance and herd behavior to better channel capital from individual savings into capital markets with more stable and predictable outlook; a crucial step toward global market integration.
Furthermore, using the Shanghai Stock Exchange opening as a model for comparison, we can expect a limited availability of stock for select investors on par with the Qualified Institutional Investor program (QFII) in China, where progress is slow but steady, the NCB report said.
Lower valuations attract investors to Saudi stocks
