(MENAFN - Arab News) What is going on with the Saudi stock market? In 2006, the market dropped from 20,635 points and to more than 73 percent of its value and remained in intensive care until recently. Now, all of a sudden, the market has risen over 7,000 points and trades at a value of more than SR12 billion daily. What is driving this new trend? The answer lies in four recent developments.
The Saudi government, through its Ministry of Housing and other investments arms, has entered the real estate market with full power to pump new money into the real estate market, this will with the private sector money will escalate prices. Essentially, the trend is analogous to the economic principle called "crowding out." What is happening is that private sector business opportunities are being crowded out by government programs, so financial liquidity will be incentivized to moves to a more attractive and welcoming place: The Saudi stock market. The government's purpose is simple: Curb real estate speculation and possible bubbles, stabilize if not reduce property prices, and promote governmental policy to increase the housing stock. Although admirable as public policy, the result is to move money out of the real estate market and into the stock market. It is expected, therefore, that stock prices will increase over time and this is being reflected in the rising value of the Saudi stock market and we will witness some correction with drop to real estate prices especially in some areas.
The government, represented by the Ministry of Finance, which does represent the fiscal and monetary policies, this month suddenly began to transfer ownership of Riyad bank stocks having a value of SR2.3 billion from the Saudi Arabian Monetary Agency to the Saudi General Pension Fund. This has caused sparked and cash flow turnover in the stock market, although it may be a recycling cash flow instead of an investment of new money. Further, the Capital Market Authority (CMA) signed recently a memorandum of joint agreement with the Saudi Arabian Monetary Agency to allow foreign companies to enter the stock market. Although the impact may be more psychological than real (being not yet implemented), one can expect the stock market to rise on the news of new foreign investments. This clearly demonstrates that there is a serious intention to move the stock market index up and thereby encourage people to purchase securities. No doubt, such a development will be good news for many people, especially those who were badly affected by the catastrophic stock market collapse of 2006. However, we must hope for more advanced transparency to root out abuses and make the field of investments fair and equitable for all.
One can now sense a rise in the "Sentiment Index" where more people are expressing optimism about the stock market and its potential rise in value. More people are talking positively about investing in the Saudi stock market, which increases public interest and decreases talk about the real estate market. This will normalize prices if not decrease prices for real estate but at the same time increase the prices for equity "Stock Market." For the first time in a long time, people are talking about stocks and real estate rather than real estate alone, which engages more people into considering an investment in the stock market.
Despite all this, the 2006 stock market debacle remains the subject of no formal investigations. Even now, we don't know the information and facts behind the loss of SR2 trillion in the value of the stock market that affected the lives and financial security of more than 4 million Saudi citizens. We must examine how we can avoid a similar catastrophe in the future and who was responsible for it, who benefited from the collapse, and what lessons we can gain from it.
Thus, it seems clear that the Saudi stock market will rise over the near term, especially in 2012. We must guard against the definition of insanity: Repeating the same experiment with the same factors and expecting a different result. We need to remember the Hadith of Prophet Mohammed (Peace Be Upon Him), which states: "A believer should not be taken twice from the same den." We must understand history or we will be doomed to repeat it. Yet, so far, we haven't made a single modification or introduced any fundamental regulations in the stock market, which will foster the financial and monetary policies to encourage people to enter the stock market again. We must be concerned that any future loss, God forbid, will now affect both the real estate and the stock markets, rather than just the stock market as happened in the past without lessons to be learned!
- Sami Al-Nwaisir (sami@alsamigroup.com) is financial economist and chairman of the board Al-Sami Holding Group.
