The Saudi Stock Market - 2009-2011 - Research Paper Example

? Global Environment of Business II MBA 535 Final Paper The Saudi Stock Market (2009 December 29, Stock market is among the most important indicator of the economy and Saudi Stock Market Tadawul holds importance for multiple factors. Therefore, for developing comprehensive study on Saudi Stock Market various aspects have been explored with evaluation of events in the market relative to events in world. Upon analysis, it was explored that world oil prices have direct impact on the TASI while internal country strength resists the impact of Asian crises on market. Factors such composition of sectors; investors as well as regulations also have dominant impact on the performance along-with world indices impact. Moreover, being in infancy stage the research as also made certain recommendations based on the research conclusions. TABLE OF CONTENTS TABLE OF CONTENTS 3 Background To The Problem 5 Role And Importance Of Stock Market 5 Importance Of Saudi Stock Market 5 Origin And Growth 6 History 6 Regulator 6 Tadawul (The Saudi Stock Exchange) 6 Current Statistics In Comparison With GCC Countries 7 Problem Statement 10 Research Objectives 10 Overview of Research Methods 11 Analysis and Findings 12 Performance Of Tadawul 12 Overall Performance Of Tadawal 12 The Collapses And The Peaks In TASI 14 Analysis Of 2011 16 Factors 17 Oil Prices 17 Investors Composition 17 Regulation 18 Comparison With Other International Markets 18 Conclusion 20 Recommendations 21 Limitation to the Research Study 22 Limitations in the research study can greatly influence the findings and analysis of the research. Therefore it is significant for the researcher to identify and comprehend the limitations of the research. This research study also has some limitations and these limitations can influence the findings of the research study. One of the most important limitations of this research study that can influence the findings is that the data has been up to 2011 as Tadawul has not published any report for the year 2012 and because of limited data, the findings of the research study have been limited to 2011. Moreover, the other limitation of the research study is that the researcher has only used secondary data while conducting the research and therefore the limitations of secondary data will also influence the findings of this research study. In addition to this, if the researcher had collected primary data and used it to analyse the findings then it would have further improved the findings of the research study. So, these limitations have influenced the findings of the research study. 22 Background To The Problem Role And Importance Of Stock Market Stock market is considered as the main component of every economy for playing multi facet role. On one hand, stock markets are reflective of economic condition in terms of growth or otherwise; while on the other hand, stock markets contribute to the economic growth with attracting local and foreign investments. Stock markets are also important as they provide an important fund raising avenue to corporate; ensuring the prices of stocks based on their value while leading profitable companies to generate considerable returns (Lamin, 1997). Hence, indentifying and understanding the factors affecting stock market are of immense importance in understanding the current economic state as well as making prediction about future economic prospect of stock market and hence the country. Importance Of Saudi Stock Market Economic status of Saudi Arabia has been regarded as unknown to global financial crises that hit the world in the recent past. This aspect of the strengthened economy has been attributed to the many factors such as increased public investment by government etc. Hence attracted attentions to explore the various components of economy and stock market being one of them and hence, making it an important avenue to explore. It is also important to explore for the fact that Saudi Stock market is the biggest market based on market capitalization among GCC constituting almost 44% of the market capitalization with US$ 24,6337 Million out of US$ 56,0141 Million (Marashdeh & Shrestha, 2010). Hence, development and growth makes Saudi Stock exchange an attractive exchange to explore. Origin And Growth History In the mid of 1930’s, the Saudi joint stock companies had their beginnings, when the Arab Automobile company was established as the first joint stock company. After that, and because of the Saudized part of the foreign banks capital in the 1970’s, a number of large corporations and joint stock banks were established. This led to about 14 public companies by the end of 1975. Furthermore, the market remained informal until the government decided on forming a regulated market for trading in 1980. Regulator Stock Market of Saudi Arabia traces its inception efforts in year 1984 when Saudi government attempted to regularize informal trading of 14 large public corporations. Ministerial level Committee with representatives from the Ministry of Finance and National Economy, Ministry of Commerce and Saudi Arabian Monetary Agency (SAMA) in collaboration regulated capital market activities. Since year 2003 Capital Market Authority (CMA) has been controlling the capital market of Saudi Arabia’s activities for compliance, fairness and efficiency etc. Tadawul (The Saudi Stock Exchange) In compliance with Article-20 of the Capital Market Law, ministries council in March 2007 approved the development of Tadawul Saudi Stock market as Tadawul All Share Index (TASI) . It initially allowed local investors to trade and later by the end of year was opened to foreign investors only by means through some mutual investment and 25% for the GCC countries (Marashdeh & Shrestha, 2010). Overall 149 companies trading within 15 sectors, Tadawul currently has traded volume of Saudi Riyal (SR) 4.30 billion as on 28th December 2012. Current Statistics In Comparison With GCC Countries Current statistics of the Saudi Stock Market Tadawul in comparison with regional GCC countries are shown in Figure 1: GCC Equity Markets Benchmark Return & Volatility which is presented below GCC Equity Market Benchmark Return And Volatility Figure 1: GCC Equity Markets Benchmark Return & Volatility (Kamco, 2012) GCC Equity Markets’ January 2012 Return With GCC market off setting in optimistic region in the beginning of 2012, Tadawul ranked on second place after DFM General Index (Dubai Financial Market). Details have been shown in Figure 2: GCC Equity Markets Return below: Figure 2: GCC Equity Markets Return (Kamco, 2012) GCC Equity Markets’ Market Capitalization Market capitalization of Saudi Stock exchange is highest among the GCC countries; another aspect asserting the importance of Tadawul. Tadawul contributes almost near to 50% of the GCC countries market with Qatar stock ranking on second as shown in but still contributing only16.67%. Tadawal also leads in the market capitalization with 149 stocks only despite 213 listed stocks on Kuwait exchange with 14.69% of market capitalization only as shown in Figure 3: Market Capitalization by Country. Figure 3: Market Capitalization by Country (Kamco, 2012) GCC Equity Markets P/E Multiples Tadawul among GCC countries has PE multiples of 14.1x as compare to average GCC PE multiple of 17.0x in Figure 4: GCC Equity Markets P/E Multiples. Figure 4: GCC Equity Markets P/E Multiples (Kamco, 2012) Various current statistics assert the importance of Tadawul as being leader or among top three leading positions. Therefore, factors that influence performance hold immense importance for investors primarily along with other respective areas. Problem Statement The problem to be addressed in underlying research is as follows: “Exploring various aspects of Saudi Stock Market Tadawul including development, performance, phases, influencers etc. Upon exploring facts, the research is also aimed at providing recommendation in areas identified areas of improvement” Research Objectives The main objective of the underlying research is to explore various aspects of stock exchange of Saudi Arabia Tadawal such as the performance of the market, factors that influence the markets and comparison of the KSA market with the markets of other countries. The objective of this research is to analyse the factors that influence the Saudi Arabian Market . This research will fulfill the objective of identifying factors that led Saudi Stock market Tadawul in peak, collapse and the stability domains in various points in time. For the stated purpose, it attempts to explore events in main market phases, overall index performance in various tenures identifying impact of various events; regulators and legal authority etc. Moreover, comparison with other international markets will also be developed. The research will also develop recommendation for improvement in the areas as Tadawul can be regarded as in infancy stage with age of only 28 years. Hence, concisely the research will fulfill following two research objectives which are to explore factors that plays role of market drivers in KSA and making practical recommendation for the identified areas of improvement. Overview of Research Methods Analysis of the Saudi Arabia Stock Market Tadabul is based is an exploratory study. For the purpose, both quantitative and qualitative research methods have been adopted in the combination. Quantitative research has been employed to explore insight based on identifying the cause and effect relationship between various events and Tadabul performance. While the qualitative research has been employed in deriving the interpretation following the trends developed for various aspects of the Tadabul. Moreover, the combination of quantitative and qualitative for comparison of the Tadabul with other international markets would be supported by interpretation developing capacity. Since the study is based on the broader domain of indentifying various aspects of the entire stock market therefore, combination of two research methodologies has been employed. Analysis and Findings Performance Of Tadawul The performance evaluation of TASI has been conducted in three sections. First the overall performance since initial establishment is evaluated while the second section is highlights the performance of TASI for year 2011. In the third section of the report, the research has made a comparison of Market of KSA with the other countries. Overall Performance Of Tadawal (Alshogeathri, 2011) in a study divided TASI in following four stages: Stage I: Initial Stage (1935-1982) This stage is characterized with very crude form of trading at Saudi stock market. Government was focused to develop economy and no or least attention was given to stock market. Since had no formal framework and the corporate drove the market according to their respective requirement. Hence, this stage does not formally account in the stock market mechanisms and therefore failed to attract public investors. Stage II: Established Stage (1983 –2002) Saudi stock market characterizes massive performance in the stated period. Economically this stage was set for diversifying Saudi dependency on oil and hence welcomed foreign investment for joint ventures in the country (Niblock & Malik, 2007). The development also pushed momentum in the formalization of stock market. SAMA Annual Report (1997) (SAMA), and (Ramady, 2005) have drafted various developments as well as hindrances of the period. (Al-Twaijry, 2006) in a study stated that on establishment in 1985 with 1000 points the stock market declined to 630.41 points in a year 1986. Recover of the index was witnessed in early 1990’s to 1182.37 points. Furthermore, in 1992 the index reached to 2298.89 point recording peak of 230%. Followed by the peak was correction in later years while in 1995 reporting closing of 1367.56 points. Upon development, the TASI indices reported move to stable movement and since 1996 to almost year 2003 it remained between 1250 and2350 points. Despite the stability in development on all fronts such regulation, operations and structure; the TASI still had way to go. Domains that remained unattended included independent brokerage services; no strict regulation implementation of laws relating to penalty such as corporation not submitting their financials etc; limited information provided to shareholders about the company operations and 70% of the stake held by the government etc (Niblock, and Malik, 2007). Hence, to ensure efficiency of the stock market operations following had to be addressed. Stage III: Modernized Stage (2003-Present) Stage attempted to development of TASI addressed factors that were considered as weakness of TASI. Among major developments, the Capital Market Authority (CMA) was established for serving as in dependent body for regulating capital market. The authority was rested rights to ensure the performance in compliance with laws developed for the efficient and fair capital market. Moreover, during the stated period products such as Sukuks were issued. TASI also witnessed considerable growth in terms of number of listed companies and from 46 companies in 1986 only to 149 companies in 2010. More specifically since 2005, 77 new companies came into trading regime of TASI; representing growth of 90% in time spam of only five years (Alshogeathri, 2011). The trading performance of TASI also jumped up after moderate movement till 2003 as it can be found in Figure 5: KSA Stock Market (TradingEconomics, 2012) Figure 5: KSA Stock Market (TradingEconomics, 2012) The Collapses And The Peaks In TASI In the history of 28 years, TASI witnessed six major collapses in years 1986, 1990, 1993, 1994, 1998, 2006 and 2008. In most events of collapse, TASI witnessed new rise over coming years. For instance, collapse of 1986 witnessed the fall in value of TASI by 6% while following three years witnessed 19% per annum growth in value. Decline of 1990 for the reason of Gulf War II by 10% witnessed regained momentum and sharp increase of 80% in coming year. Aforesaid sharp increase witnessed correction and TASI declined by 5% in 1993 and 28% in 1994. The cycle picked upward trend after 1994 for three years (Alshogeathri, 2011). Hence, every exceptional decline for any reason has been followed by regain with correction and similarly every exceptional rise has followed correction with value decrease. Moreover, every growth and decline is attributed to certain factor such as GDP growth rate of 7% and other positive economic indicators are attributed to rise in TASI value in three years forth after decline of 1994. Further, TASI reflected non-existence of immediate linkage with international market in the time where crises hit Asian in 1997 TASI value rose by 28% in comparison with its value in 1996. The rise of TASI on February 2006 has been exceptional in the short history of the Saudi Stock Exchange as it has been demonstrated in Figure 5: KSA Stock Market. TASI raised upto 20624.84 points with bulk of people joining stock market either directly or indirectly through funds etc. This excessive buying trend led to over valuation of stocks and therefore after reaching a point it declined dramatically resulting in huge losses as it can be seen in Figure 6: Annual Percentage Change in TASI below (Al-Twaijry, 2006). Hence, stock market of TASI in its movement reflected its connections and disconnections from certain events or factors while movements that had no fundamental reason behind could not retain position of either excessive rise or fall; the phenomenon applicable to every stock market. Figure 6: Annual Percentage Change in TASI (Alshogeathri, 2011) Analysis Of 2011 Tadawul is dominated by heavy market-weight sectors of banking, petrochemicals and telecoms. These sectors receive great influence from external environmental factors such as international economic situations. However, overall performance of Tadawal managed to mark lesser decline in performance as compare to other comparative markets such as GCC stock exchanges. Moreover, it rebound earlier in comparison to aforementioned markets. Performance of Tadawul for the past six years has been presented in a summarized manner in Table 1: Performance of Tadawul Table 1: Performance of Tadawul   2006 2007 2008 2009 2010 2011 2012 Tadawul All Share Index (TASI) (Points) 7,933 11,039 4,803 6,122 6,621 6,418 6,867 Despite the negative notes in various sectors of Tadawul, positive movement characterized sectors with much higher magnitude such media and publishing with around 48% positive growth etc. Also value of stocks traded in 2011 was SR 1,098.80 Bn as compare to SR 2.957 bn with 44.70% positive change. Another performance indicator of stock market is regarded as number of new listings referring to the fact the companies regarding equity market as an important avenue for raising funds. Tadawul in 2011 witnessed 5 IPOs with amount of almost US. $ 460 mn. Hence, above refers the growth of Saudi stock exchange Factors As discussed in detail in afore mentioned section, every rise and fall of the stock market, apart from speculation that self leads to correction, is attributed to certain event or factor. Moreover, magnitude of impact is dependent on the number of factors with large number of factors having prolonged impact as in case of yearly on average 35% growth for consistent seven years after 1998 collapse (Alshogeathri, 2011). Oil Prices Saudi Arabia being among the large oil producers with economy significantly dependent on oil, TASI is expected to have direct linkage between oil price and stock markets. This can be witnessed from event in 2008 July 4th, for instance, recorded highest oil price of US $145.29 and the July of 2008 also witnessed the height of 8,740.74 points. Moreover, end of the same year on 26th December recorded decline in oil price to US $37.71 and TASI also followed decline and the index closed at 4,802.99 points (NYSE, 2006). Investors Composition Samba Financial Group (2009) reported that investor’s composition is highly driven by retail component of investors constituing about 87.5% of the total investors. This segment being dominant in number but less informed of the fundamentals actually drives stock with usually the extensive incorrect valuation of stocks. Though this incorrect valuation is ultimately corrected by the market mechanism, as in case of rise and dramatic collapse of 2006 and at the same retail investors incurred heavy losses. Moreover, the factor increases the volatility of the market with price fetching upto 47 times of earnings. Regulation As already discussed above in the stages of development of Saudi Stock Market, every regulation affected the perforamance. For instance, regulation of stage II led to fluctuation for adjustment of regulation and then led to relatively stable performance with absorbing as well as responding jerks of external and internal market environments. Also in the third stage more regulation incresed the depth of the market and absorption of the newer regulations led to fluctuations. Comparison With Other International Markets Figure 7: Comparison With Other International Markets reflects comparison of TASI along with Dow Jones Industrial Average and world Trade Index. The respective movement of the TASI along with more or less magnitude in same trend as that of the comparisons, it can be established that movement in TASI can be predicted with movement of these indices. Moreover, any event that is expected to affect the other two indices shall also be considered while making decisions of investment or future prospects of the index under study. Figure 7: Comparison With Other International Markets (Alphadinar,2009) Comparison of indices is not possible based on the fact that each index is affected by large number of factors and impact of each factors drives index in respective domain. Therefore, P/E ratio is used to compare them. Table 2: Price to earnings ratio of various indices lists price to earnings ratios of various indices that are considered to be leaders in one aspect or the other: Table 2: Price to earnings ratio of various indices INDEX P/E Ratio Dow Industrial 14.55 Dow Transportation 16.62 Dow Utility 20.94 Russell 2000 30.09 Nasdaq 100 16.05 S&P 500 16.97 Dubai Financial Market 67.2 Kuwait Stock Exchange 27.3 Average GCC 17 Nikkei 225 16.48 TASI 14.1 (TheWallStreetJournal, 2012) The above statistics from (TheWallStreetJournal, 2012) shows that P/E of the Arabian markets (Average GCC) is higher than the P/E of markets such as S&P, Nikkei 225, Nasdaq 100, Dow Industrial and Dow Transportation. Moreover, the P/E of Kuwait and Dubai financial market are far superior to these markets. Therefore, it can be revealed that GCC market has performed well than the European and US markets. Conclusion Importance of stock market is self evident as reflective of economy reflector and so TASI. The developed an overall view of TASI; exploring trends and performance in various points in time it developed analysis and linkages of factors that can be attributed to have impact on TASI movement. It was explored that oil prices had multifaceted impact on stock market. Dow Jones Industrial Index and world trade index’s movement is also in line with TASI movement. Apart from these external factors internal factors such as regulation as well as sector and investor based composition also affects the overall performance of stock market. The research however, has limitations. The research accounted for various aspects in broader vision hence, detail that characterize every aspect of vast subject of stock exchange has been ignored. Moreover, identified factors are very limited among the factors that can have impact on TASI. Hence, limited broad scope covered in small version is biggest limitation; however, leaves for further research for detailed exploration. Recommendations In order to improve the condition of the market, the research has recommended some strategies. One of the strategies is that investors should limitation investment in foreign countries as it will increase efficiency in the market; as there will be more investors with international experience. Moreover, awareness shall be increased about investment mechanism by appreciating investment through institutions than direct individuals. This will also increase efficiency of market with controlling volatility. Moreover, increasing number of products should be made available for trading, as it will increase opportunities and thus will attract greater number of people and more diverse product portfolio benefits will be available to investors. Limitation to the Research Study Limitations in the research study can greatly influence the findings and analysis of the research. Therefore it is significant for the researcher to identify and comprehend the limitations of the research. This research study also has some limitations and these limitations can influence the findings of the research study. One of the most important limitations of this research study that can influence the findings is that the data has been up to 2011 as Tadawul has not published any report for the year 2012 and because of limited data, the findings of the research study have been limited to 2011. Moreover, the other limitation of the research study is that the researcher has only used secondary data while conducting the research and therefore the limitations of secondary data will also influence the findings of this research study. In addition to this, if the researcher had collected primary data and used it to analyse the findings then it would have further improved the findings of the research study. So, these limitations have influenced the findings of the research study. References Alshogeathri, M. (2011). Macroeconomic Determinants Of The Stock Market Movements: Empirical Evidence From The Saudi Stock Market. Retrieved December 28, 2012, from http://krex.k-state.edu/dspace/bitstream/handle/2097/11989/MoflehAlshogeathri2011.pdf?sequence=1 Al-Twaijry, A. (2006). Saudi Stock Market Historical View And Crisis Effect. Retrieved December 28, 2012, from http://www.slideshare.net/Zorro29/saudi-stock-market-historical-view-and-crisis-effect Kamco. (2012). GCC Equity Markets Review. Retrieved December 29, 2012, from Kamco Online: http://www.kamconline.com/NewsDetails.aspx?newsId=44093&language=en Lamin, L. (1997). Stock Market Equilibrium and Macroeconomic Fundamentals. International Monetary Fund IMF Working Papers. Marashdeh, H., & Shrestha, M. (2010). Stock Market Integration in the GCC Countries. International Research Journal of Finance and Economics , 102-114. Niblock, T., & Malik, M. (2007). The Political Economy of Saudi Arabia. Routledge: New York. NYSE. (2006). Crude oil price history. Retrieved December 29, 2012, from www.nyse.tv/crude-oil-price-history.htm Ramady, M. A. (2005). he Saudi Arabian Economy: Policies, Achievements and Challenges. New York: Springer International. SAMA. (n.d.). Retrieved December 29, 2012, from Saudi Arabian Monetary Agency: www.sama.gov.sa TheWallStreetJournal. (2012). P/Es & Yields on Major Indexes. Retrieved December 28, 2012, from http://online.wsj.com/mdc/public/page/2_3021-peyield.html TradingEconomics. (2012). Saudi Arabia Stock Market (TASI). Retrieved December 29, 2012, from http://www.tradingeconomics.com/saudi-arabia/stock-market Read More