The Saudi Stock Exchange
By Arvind Singhi
The roots of the Saudi stock exchange or Tadawul could be traced to the mid-1930s, when the Arab Automobile Company was established as the first joint stock company. The market remained informal until 1980s when the government embarked on institutionalizing and regulating the market. The Saudi Stock Exchange (Tadawul) Company was formed in March 2007. Today, Tadawul hosts 146 companies from multiple industries and is regulated by the Kingdom’s Capital Market Authority.
The listed equities are categorized among 15 sectors. The Insurance sector has the strongest presence with 31 registered companies followed by the Banking and Financial Services sector with 15 companies. However, in terms of market capitalization, the Petrochemical sector accounts for 37% of the total followed by the Banking and Financial Services sector with 27% . The figures below highlight the structure of the Tadawul as of yearend 2010.
The Saudi Stock Exchange experienced two major setbacks in the last few years.
The crash in 2006 pulled the Tadawul All-Share Index (Tasi) down from more than 20,000 points in February 2006 to just 7,933 by December in the same year. Most experts agree that the fundamental reasons behind the downturn was an overall lack of corporate transparency, ignorance of the fundamentals of investments among small investors, and the significant margin lending by the banks.
The crash in 2008 brought the Tasi down to 4,802 points by the end of 2008 compared to 10,717 at the beginning of 2008. The 2008 downturn in the stock market was a direct consequence of the global financial crisis.
The Tasi closed at 6,620 at the end of 2010.
A major effect of the most recent crisis is the reduction of small investors in the market and a consequent drop in the overall volume traded. The graph below shows a drop from an average daily volume of SAR 241 Mn in 2008 to SAR 132 Mn in 2010, a 45% drop.
Despite these setbacks, the Tasi month-to-month declines during the crisis were relatively milder than those experienced by other GCC nations. Between 2008 and 2010, the average month-to-month Tasi fluctuation was -0.6%, second only to Qatar which averaged 0.3%, and far better than Dubai at -2.7%.
The behavior of Tadawul in the recent crisis mirrors the Kingdom’s resilience to the global economic crisis. The stock exchange benefited from the robust performance of the Industrial, Petrochemical sectors, and Real Estate and Construction sectors.
Going forward, Tadawul is expected to continue providing wider product choices to consumers similar to the introduction of the first ETF (Exchange Traded Fund) in March 2010 and allowing foreign ownership through total return swaps. In addition, Tadawul is also expected to seek to attract more long-term institutional investors to balance the substantial participation by local retail investors. To achieve these goals, Tadawul will continue to implement robust governance best practices to bring greater transparency to the market and make the market more efficient.
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