In the first few weeks of April, the Tadawul, the Middle Easts most liquid equity exchange, had returned to form and bucked the downward trend of developed global markets. But until then, 2008 seemed to be the year of recoupling with western markets, rather than decoupling, as far as the Saudi stock market was concerned.
In the first six weeks of the year, the Tadawul, which trades around $3 billion daily, lost almost 20% of its value. Over the following two weeks it managed to claw back half of that loss, before losing what it had recovered in March.
According to Brad Bourland, head of research at Saudi investment firm Jadwa, this fall was primarily the result of the market having risen too far, too fast, in the last few months of 2007. Indeed, whereas in October the market had been at roughly the same level as at the start of 2007, by January 2008 it had risen almost 50%.
What triggered the downturn at the beginning of the year, says Bourland, were lower than expected earnings reported by the banks and Sabic, the petrochemicals company that is the biggest Saudi stock. In contrast, he says, a lack of bad surprises in certain banks first-quarter earnings may have spurred a slight recovery in the first half of April.
The arrival of the exchanges largest ever IPO might also have contributed to Aprils increased optimism. In adherence to the rule for all IPOs of companies without operations, the Islamic Inmaa Bank was priced at face value, even in the knowledge that it would probably trade for much more on the secondary market. Remembering the fortunes that had been made on previous IPOs, millions of Saudis were hoping for a windfall. After seven days, there were more than 5 million subscribers to the IPO, which was hoping to raise $2.8 billion.
Saudi retail investors account for about 95% of the trading volume on the stock exchange. As such, one common view among the countrys market professionals is that the bank was launched partly as a vehicle for Saudi individuals to invest in through the IPO. They say those in power sometimes treat the stock market as a means to redistribute wealth.
Daily prices on the Saudi stock exchange
The IPO was announced a year before its launch in March 2006, in the middle of a massive stock market crash that wiped out some 60% of the value of the market. "The government panicked," says a Riyadh banker. "They wanted to let the people know that there would be more handouts on the way, and that they would be able to get their money back. Because the king put his name to it, they couldnt back down."
In support of this view might be the fact that even the most basic strategy of the bank, which has no liabilities, had not been made clear before its IPO. Furthermore, the banks creator is the government. Government entities the General Retirement Organization, the Public Investment Fund, and the General Organization for Social Insurance have each put forward $400 million for the bank, and that stake, 30% of capitalization, will be retained.
Despite this, the bank has its defenders. "Small and medium-sized enterprises are underserved by the banks. Inmaa may target that market," says Bourland.
Inmaas $4 billion capitalization will make it roughly the same size as the largest Islamic institution in both Saudi Arabia and the world, Al Rajhi Bank. Other Saudi banks, which make up around 30% of the Tadawul, will hope it doesnt take business away from them. But Inmaa Banks investors might hope so too. After all, en masse, they are as exposed to those banks too.
"Events in developed global capital markets at the beginning of 2008 had a negative psychological impact on the expectations of investors on the Tadawul," says Tim Gray, chief executive of HSBC Saudi Arabia.
But others say that the fear was that the sub-prime crisis was having a direct effect on banks lower-than-expected fourth-quarter earnings. Samba, for example, recorded a net profit of $240 million for the fourth quarter of 2007, whereas in the third quarter it had bagged $350 million. Saudi Hollandi Bank even recorded a loss.
"People thought banks in Saudi had exposure to US asset-backed securities," says Hisham Tuffaha, head analyst at Bakheet Investment Group. "In general, the banks said the lower revenues were caused by lower brokerage and trading fees. Not everyone was satisfied. Provisions were up and, as a whole, the banks did not do enough to make sure people understood why."
Equity research from Dubai-based Shuaa Capital seems to support this view. "Unforeseen provisions worth SR111 million [$30 million] against depreciation of financial assets were booked [by Samba] in the last quarter, most probably reflecting exposure of the bank to US sub-prime or CDOs," says the report.