Wild fluctuations in Saudi stocks this week show the market is oversubscribed by investors who have speculated on the basis of meagre information, analysts said on Monday. During a half-hour period in late trading on Sunday, the index dived 900 points to 12,852 points, wiping 130 billion riyals ($34.7 billion) from the market's value. It then rose 750 points before falling again by 500 points.
A dealer with a leading Saudi bank said nervous investors were selling overpriced shares in companies with smaller market capitalisation's.
"Small-caps have been outperforming massively over recent weeks," he said. "A few people decided to dump their shares in these small caps. The market panicked, causing a domino effect."
The Saudi benchmark index has risen more than 67 percent this year, supported by high oil prices, which are powering the economy of the world's largest exporter.
Demand for stocks is high across the board. Half of the kingdom's 16.5 billion population applied for shares in its new Islamic bank, Bank AlBilad. But analysts say this masks a deeper malaise that often results in highly turbulent trading.
"The basic problem is that this is still an underdeveloped market, and the flow of news and information is very weak," said Fawad Rizvi, an equity economist at the Consulting Centre for Finance and Investment.
"Investors are not fully aware what they are investing in and cannot make informed choices The less information, the more speculation."
Rizvi said, that while investors should take it upon themselves to learn more about the market and its firms, the onus was also on company managers to act.
"There is not the culture of information-giving amongst managers. They have yet to understand that it is in their interests to do so."
Rizvi applauded the efforts of Saudi Arabia's financial markets regulator, the Capital Markets Authority (CMA), at trying to encourage more openness.
"If there is a rumour about a company that is moving its price, the CMA will approach that company for verification," he said. "The CMA has also said it will allow independent brokerage houses into the market to carry out research."
This week the watchdog pledged to punish 44 executives and board members of listed companies for violating a ban on trading in their own shares ahead of company profit announcements.
Other analysts say more pressure should be placed on private companies to offer shares.
"There is not a big enough supply of companies to meet demand," said investment analyst Riyad Murad. "The CMA should try to convince more firms to list to ease this demand and make the market more balanced and stable.
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