15/08/2014 14:40 AST
Seventy-year-old Saudi Arabian stock speculator Mohamed al-Otaibi says he lost hundreds of thousands of dollars in the crash of 2006, but he is back trading again as the Arab world’s biggest bourse prepares to open to direct foreign investment.
The activities of al-Otaibi and many thousands like him mean there will be a clash of investment cultures when international institutions enter the $580bn Saudi market early next year, under a plan announced by the regulator last month.
Sitting on a sofa in a trading room at Saudi financial firm Falcom in Riyadh, al-Otaibi shuns shares in the country’s heavyweight petrochemical firms and banks, believing they’re not volatile enough to offer quick profits.
Instead, he simply scans an electronic screen for stocks in which buy or sell orders are building up strongly. These often include cement, agriculture and real estate shares.
“I trade on spot, buy and sell on the same day. Sometimes I wait for two or three days, a week or a maximum of 20 days, and then sell - whenever I see strong orders in a certain stock.”
Saudi Arabia is one of the last major markets in the world to open up, so the reform is attracting massive interest among international fund managers. But they will face an unusual and in some ways difficult trading environment.
Activity is dominated by about 4.3mn retail investors who buy stocks straight from the market rather than going through professional fund managers. These retail investors owned a little more than a third of shares at the end of 2013, according to Capital Market Authority (CMA) data, but account for over 90% of daily trading volume.
The retail proportion of trading is much higher than in most other big markets around the world, a result of the slow development of the Saudi fund management industry. In many other emerging markets, retail investors account for closer to two thirds or half of turnover, and the proportion is much smaller still in developed markets.
Saudi retail investors like al-Otaibi tend to take a shorter-term approach than institutional investors, chasing quick profits, dumping stocks at the first sign of weakness, and basing decisions on news headlines, rumours or price momentum rather than the long-term valuations favoured by fund managers.
This poses risks for the foreigners. One is that local investors, anticipating the entry of foreign money, may bid stocks up sharply in the next few months, making the market opening less lucrative than international fund managers hope.
Another risk is that some shares could diverge permanently from levels which foreigners consider appropriate, because the two groups of investors use such different yardsticks.
Among the Saudi investors, events such as stock splits - when a firm divides its shares into smaller units to make them more liquid, without changing the underlying value of the company - can attract demand.
“The market is short-term and many people are investing on the basis of things like stock splits which have no fundamental economic value,” said Ali Al Nasser, who manages the Duet Group’s Middle East and North Africa Horizon fund from Dubai.
“Ninety percent of the market may not look beyond 1-1/2 or two years of future corporate earnings, while institutions like us may be taking a five-year or longer view.”
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