THE SAUDI SECURITIES MARKET

As early as 1930’s, "Arab Automobile” company was established as the first joint stock company in Saudi Arabia and by 1975 there were about 14 public companies.  Following oil exploration and economic expansion, the Saudi Government partially nationalized a few foreign banks operating in Saudi in the 1970’s. During 1970’s and 1980’s a number of new corporations and banks were incorporated. The market remained informal, until the early 1980’s when the government embarked on forming a regulated market for trading together with the required systems.  In 1984, a Ministerial Committee composed of the Ministry of Finance and National Economy, Ministry of Commerce and Saudi Arabian Monetary Agency (SAMA) was formed to regulate and develop the market. There was no physical bourse in Saudi Arabia and the market conducted business through an electronic securities information system (ESIS) since 1990 monitored by the Saudi Arabian Monetary Agency (SAMA), wherein brokerage transactions were handled by the 12 commercial banks. In October 2001, the TADAWUL system was launched which with its cut-edge technology added new dimensions to trading system. SAMA remained the government body entrusted with regulating and monitoring market activities until the Capital Market Authority (CMA) was established in July 2003 under the Capital Market Law (CML) by Royal Decree No. (M/30). The CMA is the sole regulator and supervisor of the capital market, it issues the required rules and regulations to protect investors and ensure fairness and efficiency in the market. On 19th of March 2007, the Council of Ministers approved the formation of The Saudi Stock Exchange (Tadawul) Company. Tadawul is the new service for the trading, clearing and settlement of shares in Saudi Arabia. It provides a continuous, order driven market, with up to the minute price, volume and company information dissemination. It concentrates all local equity trading into one single market. It provides an efficient and short trading cycle. Transfer of ownership occurs immediately after matching of buy and sell orders. Should trading strategies dictate, investors may buy and sell multiple times during the day. It provides accurate and speedy settlement. 100% of all trades settle on the day of execution. It supports Straight-Through Processing. Buy and sell orders are processed from order entry to transfer of ownership, thus providing support for online order delivery mechanism.

Tadawul is open for trading from Saturday to Wednesday from 11.00 am to 3.30 pm. Tadawul currently facilitates trading in the shares of 127 listed companies on a T+0 settlement basis.  Non-Saudi nationals can invest in the Tadawul market if they have a resident permit. The Saudi Stock Exchange (Tadawul) has successfully launched and implemented the new market sectors and indices, effective Saturday 05/04/2008. After the new market structure the number of sectors became 15 and market indices 16 and is calculated based on the free-floated shares only. There are currently 28 brokerage companies operating in the Saudi Stock Exchange.

 

Market Capitalization and GDP

The market capitalization of listed companies has grown consistently over the past few years and was at its peak at US$ 646.1 billion in 2005. However, market capitalization declined sharply to US$ 326.8 billion in 2006 on account of sharp fall in share prices and despite around 9 new listings. Market capitalization improved to US$ 518.9 billion in 2007 but declined again in 2008 (upto September) to US$ 387.05 billion. Saudi Arabia’s GDP at current prices has consistently increased from US$ 214.51 billion in 2003 to an estimated US$ 423.94 billion in 2008. The ratio of market capitalization to gross domestic product at current prices improved to 122.4% in 2004 from 73.3% in 2003 and reached an all time high of 204.9% in 2005. However, this ratio declined subsequently to 91.8% in 2006 but again improved to 136.1% in 2007. During the current year until the end of the third quarter, the ratio of market capitalization to gross domestic product at current prices remained around 91.3%.

 

Listed Companies and Market Capitalization

The number of companies listed on the Saudi Stock Exchange witnessed gradual increase from 70 in 2003 to 127 as of September 2008, i.e., by 81.43% over the past five years. On the other hand, market capitalization witnessed a significant jump of 310.74% from US$ 157.3 billion in 2003 to US$ 646.1 billion in 2005, mainly on account of huge price appreciation in the market.

Price Appreciation and Turnover

Saudi Stock Exchange (Tadawul) witnessed unprecedented price appreciation particularly since 2003 as the market index went up by 76.2%, 84.9% and 103.6% during 2003, 2004 and 2005, respectively.  The market witnessed a decline of 52.5% in 2006 but again appreciated by 40.8% in 2007.  So far this year, the market has declined by 32.4% until the end of September, 2008.  Along with sharp price appreciation, the turnover of the Exchange also increased sharply from US$ 159 billion to US$ 472.9 billion in 2004 and US$ 1,103.4 billion in 2006. Turnover declined to US$ 681.9 billion in 2007. During the current year, turnover was only US$ 436.3 billion until the end of September.

 

Market Volatility

Being the most actively traded market in the Gulf, the Saudi Stock Exchange (Tadawul) had an annual average daily volatility of 2.3% during the past five years. During the beginning of the current year, the market remained highly volatile with a daily volatility of 3.4% and 2% and intra-month variations of 49.7% and 33.65% respectively during January and February. However, the recent turmoil in the global markets and the fear of global recession had a significant impact on the Saudi bourse also. Daily volatility increased to 3.3% and 5.2%, while intra-month variations increased to 48.6% and 75.12% during September and October 2008.

 

Current Valuation Levels and Future Outlook

As the Saudi economy diversifies further, we may see some more listing on its stock market.  During 2008, the Exchange witnessed as many as 16 new listings and 7 additional licenses were given to new brokerage companies. In terms of market capitalization to GDP ratio and turnover to GDP ratio, the Saudi Stock Exchange compares well with the developed and best emerging markets of the world.  As Saudi government continues to pursue economic reform and diversification and promotes foreign investment in the kingdom, we expect the market to witness strong growth both in terms of new company listing and valuation.

The current valuation levels in this market are compellingly attractive following the current year’s market decline on account of the recent global market turmoil.