Most countries in the industrialized world have recently felt the sting of increasing gas prices.
Not everyone, however, is suffering. The increasing demand for oil has boosted the Saudi Arabian economy. The increased income in Saudi Arabia has led to the growth of public corporations in every sector - not just the energy field.
According to HSBC, the Tadawul, Saudi Arabia's major stock exchange, has a $500 billion market capitalization. This gives Saudi Arabia the largest emerging stock market in the world, beating both China and India. The TASI (Tadawul All-Share Index) has risen almost 550 percent in the last five years and over 120 percent in the last 12 months. Industrial and agricultural corporations have led the pack, respectively rising 150 percent and 120 percent in nine months.
There are a few causes for this unprecedented surge in Saudi Arabia's stock market, the most significant being the rising price of oil. With more money reaching Saudi Arabia, there has been more opportunity for spending and investment. This has resulted in the growth of virtually every industry sector. Additionally, the government is beginning to privatize assets, creating more opportunities for growth and investment.
Another seemingly unrelated event has induced national growth: Sept. 11, 2001. The terrorist attacks scared many Arab investors away from international ventures towards more regional investment. This, combined with low interest rates, has made it easy for corporations to get the necessary funding for extraordinary growth.
Even with spectacular gains, few are referring to the market as a bubble just yet. An HSBC analyst predicts that the market will trade at a relatively high price/earnings ratio of about 35, but analysts at SHUAA Capital, an Arab Investment Bank, believe that TASI companies will continue to grow at a pace to justify the ratio. It is hard to believe, however, that growth will continue at this rate indefinitely. The market is still very tied to the price of oil. A sudden drop would most certainly send the market sharply downward.
Unfortunately for foreign investors, Saudi Arabia makes it very difficult to invest in its stock market. According to The Economist, less than 5 percent of the Tadawul is owned by Gulf investors outside Saudi Arabia, and they are still not allowed to invest in banking and insurance stocks. This is not necessarily a serious issue for these Gulf investors, as neither sector has deviated much from the rest of the market in terms of overall growth.
For investors outside the region, direct investment is not allowed. The only way for such foreigners to invest in the market is through Saudi mutual funds. Though this may be better than being completely shut out of the market, it still has drawbacks. Investors are limited to investing in available mutual funds and must pay required fees.
Enter the Dubai International Financial Exchange (DIFX). This new way for international investors looking to make a bet on Saudi Arabia and the rest of the Middle East opened on Sept. 26 and wants to be a major international market.
The DIFX was created to supplement local exchanges and create highly liquid international capital markets with a variety of products. Not only does it allow foreign investors the opportunity to invest in an area where they were once shut out, it will make it easier and cheaper for everyone to invest. Rendering it infinitely more accessible will be the fact that shares are traded in U.S. dollars.
Another goal of the exchange is to create a market in the region that investors can trust. The Dubai Financial Services Authority (DFSA) has been set up as an independent regulatory body. The organization is composed of individuals from Australia and Britain that have experience in the field.
Many still do not trust the DFSA. Chairman Ian Hay Davison and Chief Executive Phillip Thorpe were both terminated last year after a suspect real estate transaction, though the government provided little explanation. Corporate governance issues continue to plague the regulator, who will need to strengthen internal controls before attracting significant foreign capital.
There is little doubt that the success of the DIFX internationally depends on investor confidence in both its transparent and credible diffusion of information. This is tantamount, as foreign investment in the region will allow the market to continue flourishing and will avoid a sharp descent if the price of oil decreases.
