1 Saudi Stock Market Historical View and Crisis Effect: Graphical and Statistical Analysis Abdulrahman A. Al-Twaijry Associate professor, Accounting Department, College of Business & Economics, Qassim University [email protected], [email protected]Abstract During the past year of 2006, the Saudi stock market experienced a rigorous crash after the stock price index collapsed and lost 65% of its value. The aim of this study is to review the stock market from its formal initial in 1985 until 2006. Both graphical and statistical analysis were used to highlight the stock market behavior. The results illustrated that the sharp increase in the share prices started early 2003 and until they reached their highest level by end of February 2006. Shares of the banking sector were the most profitable stock with a significant positive return mean. The cross-sectional regression results revealed that EPS and DPS are not always good predictors of the changes in the stock price index, however, the daily number of trades, turnover, and values were found to be better forecasting the stock prices even during the market crisis Saudi Stock Market Historical View and Crisis Effect: Graphical and Statistical Analysis Introduction
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Saudi Stock Market Historical View and Crisis Effect: Graphical and Statistical Analysis Abdulrahman A. Al-Twaijry
Associate professor, Accounting Department, College of Business & Economics,
Note that constant was excluded from this model because we assume that the regression line goes through the zero point as long as the explanatory variables equal to zero. Coefficients were standardized. Figure in parentheses reflects the significance.
The relationship between stock prices and number of daily trades is positively
significant. The standardized coefficient of the natural logarithm (logTrades)
was 3.06 in year 4 and increased by 40% in year 2005. In 2006 before the
crisis, it was 3.22 and reduced by about 20% during the crisis and after the
crisis return to near its value before the crisis. The effect of the daily stock
volume on the share prices is negative and significant (p = .000). The biggest
impact was in 2005 (standardized coefficient of logVolume = 14.30) and
reduced to its lowest level (logVolume = 6.03) during the 2006 crisis. In
contrast to the volume effect on stock prices, the value of the daily traded
shares has positive significant relationship with stock prices. The strongest
effect (logValue = 10.84) was in 2005 however during the crisis the effect
reduced by more than 50% (4.18) and returned back to be above 10 after the
crisis. The R adjusted square is relatively significantly high (R2 > 0.75) in all
situation. This properly means that in a developing speculating market such
as Saudi stock market, the daily disclosed data (No. of trades, turnover, and
value) can be better predictors of changes in the stock prices.
Return hypothesis
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In the long run, the return of stock share should not be different from zero.
Graphs (19), (20) and (21) exhibit this fact. The return of the share index was
fluctuating up and down with the zero line.
Graph (19) Stock market return between 1985 and 2006
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Graph (20) Stock market return for all sectors between 1985 and 2006
By comparing the figures in tables 6 and 7, we notice that the means of stock
returns (gross and individual) are much smaller in the daily return than in the
weekly return and this might means, for the speculators point view, that
keeping the share for a week is better off, but on the other hand, it is riskier
(measured by Std. Deviation).
Summary and Conclusion
Saudi stock market is relatively recent sine stock price index can be only
traced back to 1985 which means that the age of the market is about 22 years.
The number of joint stock companies less than 100 companies representing
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eight sectors. During 2006, Saudi stock market witnessed severe collapse
since the index lost about 65% of its highest level.
The stock price index started in 1985 with 1000 points and lasted with
no much changes for the following 10 years (In 1995, the index was below
1500 points). Also the index was reasonable for the following seven years (in
2002, the index was below 3000 points). The fast boom stated in the
beginning of year 2003 and the stock price index kept sharply growing
without major breakdowns to reach its top level (over 20600 points) by the
end of February 2006. After that the direction of the index changed to down
to reach 10000 points by May 2006 and then staid over 10000 point for about
five months. By the end of year 2006, the index went down again to below
7000 points and remained below 8000 point during the beginning of 2007.
The stock market index return was almost stable from its initial (1985)
until year 2003 since it started fluctuating to reach its highest variation in year
2006, in practically between February and May. However, the general index
weekly and daily return was not significantly different from zero. The average
of EPS was 9 SR in year 2003 and increased to 12.19 and 14.64 in years 2004
and 2005, respectively. Nevertheless, the mean of DPS in these three years
has not changed much (ranging between 6.34 and 7.56). The mean of
price/earning ratio was 25.87 in year 2003 and jumped to be 80.28 in year
2004 and 101.50 in year 2005 and this may suggest that the heavy increase in
the share prices was not adjusted by increase in earnings which is a sign of
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danger. The mean of the number of daily trades doubled thrice between 2003
and 2004, while the mean of the volume increased by less than 30% and the
mean of the value of daily traded shares increased from 69.4 millions in 2003
to 211 million in year 2005.
Although each individual market's (banking, manufacturing, cement,
service, electricity, telecom, insurance, and agricultural) index started with
1000 points, they vary in their trends. Both manufacturing and banking
sectors' price indexes increased dramatically to be more than 47 times of its
origin during the month of February 2006 (top levels), followed by
agricultural and cement sectors (> 13 times) whilst the remaining sectors'
indexes total increase were less than 10 times. In terms of the number and
volume of stock daily trades, both manufacturing and service achieved the
largest turnover. Banking sector achieved the highest individual index return
during the last 25 years (daily mean = 7.39 and weekly mean = 27.37).
The cross-sectional regression analysis suggested that EPS and DPS
were good predictors during 2004 (before the influence the speculators on the
market) but less powerful in 2005 and even worse in 2006. On the other
hand, daily number of trades, turnover, and values can help forecasting the
stock prices even during the market crises.
The Saudi stock market was performing sensibly from its formal initial
(1985) until the beginning of year 2003 in which the Saudi Telecom company
was converted into a joint stock company and the conversion was
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accompanied by huge media acknowledgment which encouraged people, who
were not previously aware of stock market, to invest in the new joint stock
company. During the following two years (2004 and 2005) several companies
were added to the stock market where the majority of the Saudi population
bought from their shares. In the mean time, the idea of entering into stock
market trades was accepted by many people who acted upon and started new
journey. The consequence of this development is the huge increase in the
demand side (buying) which led the share prices to boom until they collapsed.
The responsibility of Saudi stock market crisis is shared by three
parties: government (shares agency), media, and traders themselves. Many
important decisions which should have been taken by TADAWEL on time
either were not made or came late. In addition to this, people should have
been educated either directly or indirectly about when and how to invest in the
stock market. Media played negative role since there was no real warning
about the possible collapse and writers about stock market were not specialist
and indirectly encouraged people to continue speculating in the sock market
even though the share prices were unreasonably high. People, who are the
victims of the crash, are also blamed because they have jumped into the
market to join the crew without rational thinking. In general terms, people in
developing counties do not base their financial decisions on a sensible study
but rather they get advices from their families and friends and also they are
strongly affected by rumors. After the crisis many things were corrected and
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people now are better aware of the problem and thus we do not expect the
share prices to unreasonably boom again at least during the next few years.
Taking all different factors into account, we expect the stock price general
index to range between 7000 and 9000 points at least for the short-run unless
unexpected even occurs.
Future studies should focus on the cultural impact on stock market and
vise versa. This is particularly important in the developing nations since
culture plays significant role in people's life including the way of thinking and
decision making.
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Endnotes
1 See http://www.tadawul.com.sa 2 We took beginning of February instead of end of march because the crisis started end of
February 2006. 3 See http://www.tadawul.com.sa 4 This model was initially introduced by Gordon (1959). 5 This equation was developed based on previous studies.
