December 2009
Report Series
The Saudi Stock Market:
Structural Issues, Recent
Performance and Outlook
Executive Summary

The Saudi stock exchange, the Tadawul, is the largest in the Gulf region,
with current market capitalisation of around $325 billion or 70 percent of
2008 GDP. For most of 2009 the main index lagged emerging market
benchmarks by some margin, reflecting concerns about corporate
balance sheets. However, investor sentiment has recently improved.

The market has a number of structural rigidities, many of which
contributed to a substantial run-up in prices in 2005-06. The subsequent
correction was painful and prompted a number of regulatory changes,
focusing on corporate governance and transparency. The door to foreign
investment has also been opened ajar.

The short-term outlook for the market is reasonably good given firming
external demand and robust government spending, which should support
corporate profit growth. However, we see global growth softening again
towards the end of 2010.
Office of the Chief Economist
Economics Department
Samba Financial Group
P.O. Box 833, Riyadh 11421
Saudi Arabia

In the medium term, the market will be supported by Saudi Arabia’s
impressive
economic
and
financial
fundamentals,
and
further
improvements to the regulatory structure. Foreign involvement is also
ChiefEconomist@samba.com
+9661-477-4770; Ext. 1820 (Riyadh)
+4420-7659-8200
(London)
This and other publications can be
Downloaded from www.samba.com
expected to increase, and this should enhance transparency and stability.
December 2009
Table of Contents
Introduction
3
Market Overview
3
Market Structure
4
Governance
6
Recent Performance
9
Market Outlook – Short Term
10
Market Outlook – Long Term
11
2
December 2009
Introduction
Stock markets have an important economic role to play
In principle, stock markets are a useful tool for economic development.
Efficient stock markets pool private funds, and allocate them for corporate
investment. This gives firms access to cheaper capital than traditional bank
finance and also helps them to mitigate financial risk. Stock markets also
encourage efficiency through the prospect of takeover: if management does
not maximise shareholder value, then another economic agent could take
control of the firm and introduce more efficient practices and personnel.
Stock markets can encourage
more efficient corporate behavior
Academic research indicates that various measures of stock market activity
are positively correlated with stronger economic growth and productivity
improvement across countries and that the association is particularly strong in
emerging markets.
There are drawbacks however. For example, very liquid stock markets might
negatively influence corporate governance: with share prices rising, investors
might be tempted to take a relaxed view of management practices, safe in the
knowledge that they can sell their shares at any time and for a profit (this was
the case in Saudi Arabia in the middle of this decade). Markets also tend to
favour big firms over smaller ones, often with little regard to efficiency. Thus,
large inefficient firms are more likely to take over and/or absorb small efficient
firms without any improvement in their own management practices.
Saudi Arabia: Tadawul All Share Index
20000
15000
10000
5000
Robust supporting institutions are necessary for a market to thrive
0
Dec-00
Mar-03
Source: Bloomberg
Jun-05
Sep-07
Dec-09
For a market to thrive, it also needs to have robust supporting architecture,
such as good quality institutions and a well-functioning supervisory structure.
These are often lacking in emerging markets. Other research points to the
importance of foreign investment as a catalyst to the development of
emerging market bourses.
In this paper we will consider the structure and main characteristics of the
Saudi stock market; key regulatory changes following the 2006 correction;
and the bourse’s recent performance and outlook. We will start by looking at
the market’s essential characteristics.
Market Overview
The Tadawul is easily the biggest
market in the Arab world
Saudi bourse dwarfs others in the Arab world
The Saudi bourse, known as the Tadawul, is easily the largest in the Arab
World. In mid-Decemer its market capitalisation was around $313 billion,
dwarfing that of the next largest, Kuwait, which had a market cap of $94
billion. As a percentage of GDP, the Tadawul’s market cap is around 67
3
December 2009
64.4
64
Abu Dhabi
Morocco
Bahrain
Oman
33.4 16.4 16.2
Dubai
Egypt
Qatar
Kuwait
93.9 86.3 86.2
Saudi Arabia
percent of 2008 GDP or 82 percent of our forecast for 2009 GDP. The bourse
is technologically advanced, and introduced the world’s first fully electronic
market in the 1990s, comprising trading, clearing, settlement and depository.
Stock Market Capitalisation
(as of December 9, $ billion)
313
The main index, the Tadawul All Share Index (TASI) reached its zenith in
February 25 2006, when it closed at 20,635. The TASI is currently trading at
around 6000. In 2008 the Tadawul was second only to London for new equity
issuance, though Saudi IPOs dwindled rapidly after the intensification of the
international financial crisis in October of that year.
The Saudi Arabia Monetary Agency (SAMA) was responsible for supervising
the market from 1984 until 2003. In July 2003, authority was handed over to
the newly-formed Capital Market Authority (CMA). The CMA is now the sole
regulator and supervisor of Saudi Arabia’s capital markets, and issues the
necessary rules and regulations to protect investors and ensure fairness and
efficiency in the market.
Source: Zawya
Door has been gradually opened to foreign participation
Tadawul: IPOs, 2007-09
(number)
10
For many years the Tadawul was open to only Saudi nationals. In December
2007, as part of the moves to establish a GCC common market, the Tadawul
was opened to GCC nationals, though their participation remains limited as
they have tended to focus on their domestic markets. Until 2008, non-Arab
foreigners who were not resident in the Kingdom could only participate
through few mutual funds. However, in August 2008 the CMA approved new
rules that allowed non-Arab foreigners to participate in share trading through
swap arrangements with local CMA-approved and -licensed intermediaries.
8
6
4
2
0
Jan-07
Sep-07
Source: Tadawul
May-08
Jan-09
Sep-09
Market Structure
Financials and Petrochemicals are the largest sectors
The Saudi stock market currently lists 134 companies, divided into nine
sectors, according to Bloomberg’s classification, each of which has its own
sub-index. In order of size, they are:
Financials
Tadawul: Market Share by Sector
(percent of market cap, December 9 2009)
Industrials
Utilities, 1.8
Consumer
goods, 4.1
Consumer
services, 3.7
Oil & gas,
1.7
Basic Materials (Petrochemicals)
Healthcare,
0.4
Industrials,
10.8
Telecoms
Consumer Goods
Consumer Services
Oil and Gas
Telecoms,
8.1
Utilities
Basic
materials,
23.5
Source: Tadawul
Financials,
46.0
Healthcare
Financials and Basic Materials are the dominant sectors, together accounting
4
December 2009
Tadawul: Buy Transactions by Source,
November 2009
(percent of value)
Non-Arab
residents,
0.2
GCC/Arab
citizens, 3.0
Mutual
funds, 1.5
for just under 70 percent of market capitalisation. The biggest two companies
by market share are Al Rajhi Bank and the petrochemicals producer, Sabic,
both of which command around 11 percent of the market. However, some of
the smaller sectors have larger numbers of companies: for example, the
Consumer Goods sector contains 16 companies, despite accounting for just 4
percent of the market’s value.
Foreign
swap
agreements,
1.2
The market is dominated by retail investors…
Saudi
corporates,
7.0
Saudi
individuals,
87.5
Source:
Tadawul
100
These small cap firms tend to be heavily traded by retail investors, who
dominate the market. Retail investors accounted for 88 percent of buy
transactions in November 2009 (essentially unchanged from a year earlier).
Saudi corporations accounted for just 7.0 percent of such orders, while mutual
funds registered 1.5 percent. In large OECD bourses, such as London’s,
institutional investors tend to account for around 90 percent of transactions.
GCC and other Arab citizens accounted for 3 percent of buys, while
foreigners resident in the Kingdom registered just 0.2 percent. Foreigners
resident outside the Kingdom placed 1.2 percent of buy orders with a small
number of transactions. This indicates that their average purchase was
sizeable, which fits the profile of large foreign institutions looking to buy and
hold Saudi shares. Nevertheless, there was a net outflow of this type in
November, reflecting unease caused by the Dubai World debt standstill
request (see below).
Volatility: TASI vs MSCI EM
(daily standard deviation, absolute spread)
80
…who have contributed to considerable volatility
60
40
20
0
Jan-05
Jun-07
Source: Bloomberg
21000
Nov-09
TASI
MSCI
A massive run-up in prices was followed by a painful downturn
Tadawul All Share Index
(2005-06 )
Unsurprisingly, valuations became increasingly stretched with the average
price-to-earnings ratio reaching a high of 47 in late February 2006 (the ratio
exceeded 100 for a number of companies). Expected corporate profit growth
began to run ahead of actual results; this was compounded by annual
reporting showing that many companies had invested heavily in the stock
exchange and booked unrealised stock market earnings.
14000
7000
Jan-05
Source: Bloomberg
The long-standing dominance of retail investors has led to considerable
volatility in the Saudi bourse. The middle part of this decade saw a vertiginous
run-up in the TASI. This reflected a number of factors, but key among them
was a huge influx of small first-time traders attracted by a number of underpriced IPOs. (Under-priced IPOs encourage investors to sell part of their
existing holdings in order to raise capital to invest in the new issues, thereby
fuelling volatility.) Between 2003 and its peak in February 2006 the index
gained a staggering 700 percent, with market capitalisation soaring to $800
billion—around two-and-a-half times nominal GDP. At its peak, the Tadawul
was the world’s tenth largest stock market by value, despite having only 78
listed stocks, many with a limited free float.
Dec-05
Nov-06
The correction, when it came, was severe, with the TASI losing half its value
in less than three months, ending the year more than 53 percent below where
it began. Between the peak and end-2006 nearly $480 billion was removed
5
December 2009
from the value of the exchange, equivalent to about 140 percent of 2006
GDP.
Tadawul: Market Capitalisation
(2005-06 ; $ bn)
800
700
This pattern was repeated, to varying degrees, across most of the other GCC
states. Abu Dhabi, Qatar and especially Dubai all witnessed tremendous
surges in stock prices in 2005, before experiencing equally abrupt (and in
some cases even steeper) falls.
600
500
400
300
200
Jan-05
Dec-05
Source: Bloomberg
Nov-06
Governance
Millions of Saudis lost considerable sums in the stock market crash. Mindful of
their distress, and to prevent any repeat, the CMA was quick to articulate a
three pronged strategy: increase the size and, most importantly, the depth of
the market; improve transparency and disclosure; and clamp down on insider
trading.
Authorities are keen to boost foreign participation
The authorities have taken a
number of steps to boost foreign
participation
Foreigners can now participate
through swap arrangements
The key to deepening the market lies with institutional participation,
particularly from foreign entities. Foreign institutions have the potential to
reduce volatility in the market by buying when stocks are undervalued and
withdrawing when valuations become stretched. Their focus on research also
tends to discourage bubbles from developing and, by promoting more
rigorous scrutiny of the market, helps to improve corporate governance.
Granted, sudden inflows or outflows of foreign ―hot money‖ can destablilise
markets, such as during the 1998 Asian crisis—but by and large foreign
institutions, particularly pension and mutual funds, are seen as a positive
force.
Since 2005, the authorities have awarded investment banking licenses to a
number of foreign banks, who have also been allowed to provide brokerage
services. Consequently, the quantity and quality of corporate research has
improved markedly, and many investors are now better informed than
previously. Regular analysis of individual shares of major companies is now
available, providing valuations based on internationally recognised models
such as Discounted Equity Cash Flow, Dividend Discount and peer-based
valuations, as well as buy, hold or sell recommendations. Better quality
research should complement the execution and clearing, settlement and
custody systems, which are already highly-regarded.
Foreign participation through swap arrangements has been initiated
Developments such as this paved the way for the most significant regulatory
move to date. In August 2008, the CMA granted non-resident and non-Arab
foreign investors the opportunity to buy Saudi shares for the first time. Prior to
this action, foreign investors’ access was restricted to mutual funds. Foreign
asset managers are still not allowed to trade shares directly but must enter
into a swap arrangement in which their CMA-approved and –licensed
brokerage conducts the trade on their behalf and then retain the shares,
6
December 2009
passing on any profits or dividends. Until recently, interest was muted given
the widespread aversion to emerging market securities, but activity has
increased sharply in recent months. The value of foreign swap purchases in
October was $472 million—small perhaps, but up sharply from the $250
million recorded in September and the $45 million recorded a year earlier (a
relatively large outflow was recorded in November, however, as the Dubai
World debt standstill request reverberated around regional bourses—see
below). Interest has come mainly from emerging market fund managers and
hedge funds.
Tadawul: Foreign Swap Activity
(SR m)
2000
1500
1000
500
0
Aug-08
Source: Tadawul
Jan-09
Jun-09
Buys
Nov-09
Sells
However, swap arrangements imply enhanced counterparty risk
One drawback with the swap arrangements is that they do not confer
ownership rights, meaning that foreign buyers have no obvious recourse
should their brokerage enter into administration. Sensitivity to counterparty
risk has grown in the wake of the turmoil that followed the collapse of Lehman
Brothers in 2008. The lack of direct ownership also prevents international
investors that build significant stakes in companies from pushing for
representation on the board or from voting in the event of a takeover bid.
Other efforts to boost the Tadawul’s foreign appeal are in train
There are concerns about the
degree of counterparty risk
inherent in swap arrangements
Other lower-profile developments have also piqued foreign interest. Earlier
this year the CMA indicated it was considering the possibility of allowing
exchange traded funds (ETFs). ETFs can be bought and sold like shares,
have lower costs than mutual funds and give exposure to a wider constituent
than individual shares. The CMA certainly sees the value of ETFs, though no
timetable for their rollout has yet been announced. The CMA has also
indicated that it is considering introducing derivatives, such as options and
futures, as an obvious way of allowing institutions (and individuals) to hedge.
However, it is unlikely to allow the full panoply of products that contributed to
the global financial crisis.
More definite progress has been recorded with regard to indexing, which
provides the platform for many ETFs. In July 2009, the US’ Dow Jones
Indexes became the first international index provider to offer indices on the
Tadawul. Dow is now providing four Saudi indices based on real time data
and prices from the Kingdom. Standard & Poor’s and Bloomberg have also
reached similar agreements to provide indices.
A number of foreign firms are now
providing Tadawul indices
Since the start of the year the CMA has also granted four institutions licences
to launch indices tracking the performance of sharia-compliant companies
listed on the exchange. The strong position of Islamic finance in the kingdom
means that investor demand for sharia-compliant products is healthy.
Moreover, there is also strong demand worldwide for such products.
According to Singapore-based data provider Eurekahedge, which tracks the
global funds industry, there are now more than 608 Islamic investment funds
globally, valued at $60bn in total.
7
December 2009
Authorities hope foreign institutions will enhance transparency
The participation of foreign institutions should in turn help to drive greater
transparency. There has been measurable progress on this: in November
2006 the CMA launched a new Corporate Governance Code, which includes
measures to boost shareholder rights, establish and enhance the role of
nonexecutive directors, improve the level and frequency of corporate
reporting, and publish details of directors’ remuneration. Although large parts
of the code are still voluntary, the CMA now insists that the names of
individual shareholders with more than 5 percent of listed companies be
disclosed. In November 2008, the CMA made earning disclosures, which had
previously been voluntary, mandatory in the case of listed companies.
Corporate governance regulations
have been beefed up
Yet there is still much to do to convince listed firms (particularly the smaller
ones) to heed international best practice. Many listed firms with a limited free
float retain family-ownership structures that tend to blur the dividing line
between ownership and management. It is hoped that as foreign investors
become more active in the market, their preference for greater accountability
will encourage wider adoption of the CMA’s code.
There has been a crackdown on insider trading
TASI vs Private Sector Credit Growth,
2005-06
40
18000
20
13000
8000
A lack of transparency tends to go hand-in-hand with insider trading. The
CMA has stepped up its surveillance and prosecution of this practice. In 2007,
the regulator introduced a new trading system that has enabled it to track
trades and individual traders far more rigorously than previously. Nearly 400
cases of suspected market manipulation have been investigated by the
regulator, approximately 30 of which are currently going through the court
process. Several high-profile market participants have been publicly convicted
and fined, and one has even been imprisoned.
0
Jan-05
Aug-05
Mar-06
Oct-06
Private sector credit (12 month percent change, rhs)
TASI (lhs)
Source: Bloomberg; SAMA
Caps on personal credit have helped stabilise the market to some extent
One further measure instituted by the authorities involves limiting the credit
available for speculative activity. An extremely liquid monetary environment
certainly contributed to the 2005 bubble: private sector credit growth, having
averaged around 10 percent a year in 2002-04, soared to 37 percent in 2004
and to 39 percent in 2005 as the frenzy to invest was translated into soaring
demand for new bank credit. Bank lending was largely unrestrained, with
loans that were ostensibly meant for other purposes often finding their way
into the stock market.
In November 2005, SAMA implemented a policy limiting repayments on
personal loans and credit cards to one third of an individual's salary, later
tightened to one third of salary across the banking system (mortgages are not
covered under these guidelines). It also capped the tenor on personal loans to
60 months. Reduced leverage has aided the stability of the market, although
the Tadawul continues to be buffeted by global currents.
8
December 2009
300
Recent Performance
TASI vs. MSCI-EM, 2005-07
(Jan. 2005 = 100)
The TASI is broadly tracking global benchmarks…
250
200
150
100
50
0
Jan-05
Dec-05
Nov-06
TASI
Source: Bloomberg
160
Oct-07
MSCI - EM
TASI vs. MSCI-EM, 2007-09
(Jan. 2007 = 100)
140
This realignment did not prevent another serious period of turbulence in 2008.
Surging global equity markets and oil prices in the first part of the year
prompted a spike in activity on the Tadawul. However, this was followed by an
abrupt collapse in the second half as the global financial system seized up.
Although not as severe as the correction in 2006, the TASI still shed 49
percent between June and December, ending the year at 4800. Market
capitalisation fell to $244 billion. The biggest loser by sector was
petrochemicals, which lost 63 percent of its value during the course of the
year, with investors concerned about a global supply glut and an apparent
shortage of gas feedstock in Saudi Arabia.
The TASI continued to track emerging equity markets—as measured by the
MSCI EM—very closely in the first quarter of 2009. Performance was
subdued as the global economic recession hardened and oil prices also
tracked lower. In the second quarter, global economic conditions began to
improve, with the first signs that financial markets had stabilised and the real
economy was nearing, or at, its trough. Oil prices also began to move
upwards again. This saw the MSCI-EM gain 62 percent during the quarter.
120
100
80
60
40
Jan-07
The run-up in the stock market during the middle part of the decade saw the
TASI soar well above global equity benchmarks as speculators ignored
fundamentals and gambled that prices would keep on rising. The subsequent
crash saw the TASI lag global benchmarks for over a year. Since the
beginning of 2008, the index has basically realigned itself with the direction of
global equity markets.
Sep-07
Source: Bloomberg
Jun-08
Mar-09
Dec-09
TASI
MSCI - EM
Tadawul: Performance by Sector
(Jan. 2008: 100)
…though there has been some divergence
Although the TASI initially tracked the benchmark higher, its recovery stalled
in May as concerns about debt problems in the Saudi corporate sector began
to emerge. The scale of these problems is almost impossible to quantify given
a lack of publicly available data. Nevertheless, this opacity itself unsettled
investors, and while the MSCI EM gained upward momentum, the TASI
remained subdued, adding just 19 percent during the second quarter. The lull
in activity during the summer, followed immediately by the onset of the Muslim
holy month of Ramadan further dampened activity in the third quarter.
Investors have been unsettled by recent events, though the Tadawul has
performed better than most
105
85
65
45
25
Jan-08
Source:
Bloomberg
Aug-08
TASI
Telecoms
Apr-09
Dec-09
Petrochemicals
Financials
Notwithstanding a pickup in September, when the TASI edged above the
6,500 mark, the stock market’s performance has been uneven, and has once
again diverged from the broadly upward trajectory of global markets. Third
quarter corporate results were subdued, with 12-month earnings per share
growth down more than 30 percent, even though many firms beat analysts’
expectations. Profit-taking also contributed to the generally lacklustre
performance. More fundamentally, the limits on foreign participation meant
9
December 2009
Price/Earnings Ratios
(Current Year Estimate, December 7)
20.4
17.4
that the Tadawul did not benefit from the level of inflows seen elsewhere in
the emerging world.
22.9
17.0
16.8
12.4
11.0
14.3
FTSE100
S&P 500
Russia
China
India
Brazil
Qatar
Abu
Dhabi
Saudi
Arabia
Dubai
6.6 8.1
Source: Bloomberg
110.0
Saudi Arabia: Relative Stock Market
Performance
(5 November 2009 = 100)
This worked in the Kingdom’s favour when Dubai World made its shock
request for a standstill on some of its $60 billion in debt in late November. The
request was poorly received by creditors and sparked a major sell-off in global
equity markets, as well as in the region. By December 9 the main index of the
Dubai Financial Market (DFM) was down 26 percent from the date of the
announcement (and that decline was capped by daily limits), while other Gulf
markets had also taken heavy hits. Saudi Arabia, by contrast, had shed a
comparatively mild 5.5 percent. In response to the Dubai announcement
foreigners unwound many of their swap positions on the Tadawul in
November, but at a net outflow just SR385 million, this had little impact on the
overall index.
Saudi investors’ relative calm is illustrated by comparative valuations.
Bloomberg’s full-year estimate for the average Saudi p/e was around 17.4 in
early December, some way ahead of its Gulf peers, but in line with valuations
in the BRIC countries
105.0
100.0
95.0
90.0
85.0
80.0
5-Nov-09
21-Nov-09
7-Dec-09
Tadawul All Share
Dubai (DFM)
Source:
Bloomberg
Market Outlook – Short Term
Oil prices and the global recovery are supporting sentiment…
Is the equanimity of Saudi investors justified? To answer this, it is worth
sketching out what is currently supporting sentiment and how we see the
market performing over the next year or so.
Ethylene Prices
(Japan spot, fob, $/metric ton)
1600
The market’s current stability is being supported by four main factors:
1200
800
400
0
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
First, the strengthening of external demand has raised hopes that corporate
profitability will begin to firm, and thereby ease concerns about debt financing.
For example, petrochemicals prices have increased sharply in 2009—
following last year’s collapse—with the benchmark price of ethylene rising by
67 percent so far in 2009 (year to date).
Source: Bloomberg
Saudi Arabia: Points of Sale Transactions
(value; 12 month percent change)
40.0
30.0
20.0
10.0
0.0
-10.0 Oct-08
-20.0
Source: SAMA
Jan-09
Apr-09
Jul-09
Oct-09
Second, domestic consumer demand appears to be firming. Following almost
a year of weakening growth, points of sale transactions (a proxy for retail
sales), bounced back in the past three months, signalling that Saudi
consumers may have recovered their confidence. This has improved the
outlook for domestic sectors such as wholesale, retail and transport services.
Third, global markets are continuing to track upwards, albeit with the usual
day-to-day volatility. Equity markets are being supported by reasonably brisk
level of economic activity in many emerging markets, particularly in East Asia
and some Latin American countries, which are benefitting from renewed
strength in global demand for commodities and recovering risk appetite
among Western institutions. As noted above, the structural limitations on
foreign participation mean that this is unlikely to have much direct impact on
10
December 2009
150
Oil Prices: WTI
($/bbl)
the Saudi bourse, but it should help to bolster sentiment.
Fourth, oil prices remain high by historical standards. Oil prices will not have a
critical short-term bearing on the country’s economic health given the
government’s strong financial position, but they will still have a an important
bearing on consumer confidence and investor sentiment.
110
70
…but we remain cautious about the second half of 2010
30
Jun-08 Oct-08 Jan-09
Source: Bloomberg
Apr-09 Aug-09 Nov-09
Domestically-focused firms are
likely to fare better than export
oriented ones
Our six-month outlook broadly matches investors’ expectations. We are
perhaps more guarded about the prospects for Saudi corporate growth since
we believe that banks will remain cautious about extending fresh credit for
some time; nevertheless, export demand is increasing, and with domestic
demand also firming, corporate profitability is set to improve. Oil prices should
maintain an upward trajectory, assuming supply restraint does not unravel.
We also note that oil prices continue to exhibit a close inverse relationship to
U.S. dollar movements. Currency movements are notoriously difficult to
predict, but the massive build-up in U.S. government debt points to some U.S.
dollar weakness in the short term.
However, we are less sanguine about the horizon beyond six months. There
is no doubt that financial market confidence and risk appetite have
strengthened, contributing to and reinforcing a further rally in asset prices.
However, the primary triggers have been proactive fiscal and monetary
policies in both advanced and emerging market economies (along with
restocking). The impact of these stimuli should not be underplayed: for
example, the OECD estimates that the fiscal stimuli undertaken by OECD
states were equivalent to 3.5 percent of members’ GDP. Once the impact of
this fades (and many of the measures are of the ―one-off‖ variety) then global
output could well begin to slow again. Fundamentals are still poor: credit
remains tight for many borrowers, unemployment is still rising, and business
investment will be dampened by widespread spare capacity.
Thus, it may well be that external demand begins to soften again in 6-12
months time. This could put some downward pressure on oil prices, and cloud
the prospects for firms in sectors such as petrochemicals, oil refining and
steel production (the shortage of gas feedstock will serve as a separate
constraint on petrochemicals output). Domestic demand should hold up
better, thanks to robust public sector investment, which should remain brisk
well into 2011. Private consumption should also tick upwards. Therefore, firms
that are more focused on domestic markets, such as retail, real estate and
telecoms, among others, should fare better than those relying on exports.
Market Outlook – Long Term
Solid fundamentals support the
long-term outlook
An excellent long-term play, but foreign investment will dictate pace of
change
The Tadawul is rightly seen as having enormous long-term potential given the
11
December 2009
Kingdom’s abundant economic and financial assets and its favourable
demographic outlook. With 20 percent of the world’s oil reserves, foreign
assets of around 90 percent of GDP, and a young and fast-growing
population, the stock market—and the economy more generally—represents
an excellent long-term play. However, as discussed above, the pace of
development will be determined largely by foreign involvement in the market.
Price/Earning Ratios
(end-month current )
50
40
30
20
10
0
Jan-09
TASI
Jun-09
Brazil
Nov-09
China
Russia
Source: Bloomberg
The Tadawul has an important role
to play as an agent of corporate
and economic change
Foreign investors have been impressed with the CMA’s reform agenda and its
willingness to enforce such reforms. Yet many remain hesitant in the face of
unanswered questions, such as the degree of counterparty risk that swap
arrangements entail, and whether foreigners will be allowed full access to the
market in the near term. Looking at the broader market, many foreign
institutions would like to see an end to the deliberate under-pricing of IPOs
given the instability that these sales tend to impart to the market.
If the CMA continues to push through its reform agenda, and full foreign
investment is allowed into the exchange, then the market should become
more stable, predictable and transparent. This, in turn, should help to
convince more local firms to list on the exchange, particularly if bank credit
remains at a premium. Currently, many of the family-owned firms that have
resisted listing have done so precisely because of the greater scrutiny that
this might entail. Over time, it might be possible to create a virtuous circle
whereby listing, and the transparency that this entails, allows firms to raise
capital cheaply on the Tadawul, thereby encouraging additional firms to list.
Generational pressures may also encourage more firms to list. Those of the
younger generation who may be reluctant to become involved in managing
the family business tend to view listing as an efficient and profitable way to
liquidate their holdings. This trend has become a new feature of other
emerging markets, particularly those in Latin America.
The Tadawul’s evolution into Saudi Arabia’s primary centre for raising
corporate capital will clearly be a long-term process. But assuming that full
foreign investment is allowed, and surveillance and enforcement continue to
be tightened, the Tadawul has the potential to become both the main market
for Saudi corporate finance and an important agent of corporate and
economic change.
12
December 2009
Keith Savard
Director of Economic Research
Keith.Savard@samba.com
James Reeve
Senior Economist
James.Reeve@samba.com
Andrew B. Gilmour
Senior Economist
Andrew.Gilmour@samba.com
Raza A. Agha
Research Economist
Raza.Agha@samba.com
Touheed Ahmed
Management Associate
Touheed.Ahmed@samba.com
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