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Finance & Banking | Global Arab Network
Something is wrong with our stock markets
Global Arab Network - Dr Mohamed Ramady
Admiral David Beatty reportedly said that “something is wrong with our bloody ships today”, commenting on British naval losses during the Battle of Jutland in the First World War.
The same can be said about the regional stock markets in general and the Saudi stock market specifically, as current index levels do not seem to reflect the fundamentals of some of the stronger GCC economies.

The UK’s FTSE 100 index of leading shares rose above the key 5100 level for the first time since September 26 last year, buoyed by hopes the recession may be over and by the return of multibillion-pound mergers.

The FTSE index has now recovered 44 per cent from the six-year lows reached in March this year.

Other stock markets around the world are making small, but perceptible gains. Oil prices have risen to US$65-$70 levels and are staying there, compared with the lows of $35 a barrel.

Rising crude prices and a major discovery off the coast of Brazil lifted oil companies, while government bonds fell to their lowest level for a month as equities moved higher.

Despite all this cautious optimism, some Gulf stock markets remain lethargic despite some pre-Ramadan ending gains but remain out of synchronisation with the rest of the world. The Gulf might be part of a global economy in many respects, but when it comes to the regional stock markets, local sentiment predominates.

During the recent global stock market upheavals something curious happened in some Gulf markets, typified by Saudi Arabia. A sense of euphoria took over. Local stocks, which had been listless and directionless, suddenly sprang into life and flashed green.

The Tadawul index moved up by about 8 per cent in a few days, and tried to break the 9,000 level in October last year. And then something more extraordinary happened.

The international stock markets seemed to rebound after analysts concluded that the falls had gone too far, and there was still value in stocks.

In Saudi Arabia, the opposite happened. The Tadawul lost ground, as Saudi investors hurriedly sold out and took profit, and has been languishing at the 5,700-5,800 ranges, although closing Ramadan at 5,900 levels.

The local market seemed to be out of sync with the rest of the world, with no apparent correlation.

If this had occurred once, we could put it down to temporary phenomena, and explain it away in terms of a flight to safety in local markets.

The above events were repeated, however, when the global markets once again took a dip based on US housing data, and the Saudi markets rebounded.

Some have argued that the non-correlation of the Saudi market was because it was not cross-listed with other stock markets.

If it were, it is argued, sharp falls in one market would be corrected in another, based on technical and fundamental analysis of under-valued stocks.

Until that happens, and the Saudi market opens up to international investors with stocks cross-listed, one has to fall back and try to analyse the behaviour of Saudi market investors to explain stock market movements.

Analysing trends over the past 12 to 14 months, one can describe the events of the Saudi market as having gone through cycles of euphoria, rationality and amnesia in unequal closes.

The Tadawul index illustrates this, reaching 11,500 levels in January last year, 7,600 in September last year and 5,800 this month.

Due to a perceived lack of transparency, the Saudi market still seems to be gripped by mass psychosis. This typifies the period of financial euphoria when the Tadawul reached a peak of 20,900 in February 2006.

In that boom period, the general paper profit-making became temporarily, self-fulfilling prophecies that led to self-sustaining and self-congratulatory behaviour.

This sucks in both the “irrational” unsophisticated investors as well as the “rational” analytic investors. In economics terms, this leads to all investors having a “vested interest in error”.

As members of a crowd, all are willing to suspend disbelief on what is happening. The herd mentality sets in. The same trends are evident in the other Gulf markets.

Following a period of financial euphoria, the inevitable crash occurs as doubts and unease creeps in. All that is required for a crash to occur is either a market-related or an external event, or in the case of Saudi Arabia, for the rumour mill circuit to take over.

The Capital Market Authority (CMA), the market regulator, has introduced tougher sentences on insider dealers, suspended listed companies, and insisted on more transparent listed company reporting requirements.

This seems to have brought a certain degree of public confidence; especially with the most recent high-profile penalties imposed on alleged Saudi insider dealers.

The Tadawul index now reflects a more cautious, but rational behaviour, with investors swayed by CMA actions and announcements, as well as a closer analysis of company financial results and professional stock market company evaluations. Trading ranges have remained within narrow bands and gone it seems are the daily price fluctuations of 8 to 10 per cent.

Let us hope it remains that way, and that nothing is really fundamentally wrong with our markets.

Global Arab Network

Dr Mohamed A Ramady is a former banker and a visiting associate professor, finance and economics at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia, this article appeared in The National.

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