Return of investor confidence at Tadawul

The Saudi stock market has had a strong start to the year. By the end of March 21, it had climbed by 17.5 percent. Over this period it crossed 7,000 points for the first time since September 2008 and rose for 14 consecutive days for the first time since at least 1998. Similar gains have been recorded and then not sustained the last few years. For example, in the first three months of 2010, the TASI (Tadawul All-Share Index) rose by over 11 percent, but it ended the year 2.7 percent below the end-March level, according to a report by Jadwa Investment.

The simplest reason for the revival of the market has been the return of investor confidence. The stock market crash of 2006, when the TASI plunged from almost 21,000 to below 8,000, followed by the global financial crisis, which took the TASI down to just over 4,000, decimated the confidence of investors. Although the TASI rose in recent years, investor enthusiasm was low, with daily volumes around one-tenth of what they were at the peak of the market.

In contrast, the current rally has occurred amid high volumes suggesting that investors are returning to the market seriously. The total value of shares traded peaked at SR21.6 billion on March 19, the highest since March 2007, and has been above SR10 billion every day since Feb. 19. This compares to a daily average of SR4.4 billion in 2011 and SR3 billion in 2010. Furthermore, an increasing number of dormant brokerage accounts are being reactivated, the Jadwa report said.

Another indicator of the shift in investor sentiment was the jump in price in the first day of trading for the two companies that listed during February. The share price of plastic packaging company Takween jumped by 125 percent on listing, while that of Saudi Enaya Cooperative Insurance surged by 267 percent. During the market's boom years exceptionally high first-day gains were common. While these have occurred occasionally with some subsequent insurance company listings, the companies were very small. Takween was the first new listing of over SR100 million to record triple-digit first-day growth since Basic Chemical Industries in the first half of 2008; Saudi Enaya also raised over SR100 million.

According to Jadwa, combination of local, regional and global factors have caused the revival in confidence that has lifted the TASI so far this year:

Valuations
Over the past couple of years company earnings and their share prices have been disconnected. Earnings have been strong, with net income rising by 36 percent in 2010 and by 21 percent in 2011, but the TASI was up by only 8 percent in 2010 and fell by 3 percent last year. As a result, the price-to-earnings ratio of the market was below 12 for much of the final quarter of last year, a level previously only seen at the depths of the financial crisis in late 2008 and early 2009.

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