Tadawul (Saudi Arabia) Stock Market Crashes; Saudi King Abdullah Plans "Risk-Free Fund"

The Saudi Arabian stock market has been through a spectacular boom-bust cycle driven by a speculative frenzy over the boom in oil prices along with government sanctioned mass participation in the market:

In the past three years, up to nine million Saudis, or half the population, have started playing the market in the conservative desert state, whose strict brand of Islam outlaws standard forms of gambling.

They were encouraged by a government which hoped the bourse would enable citizens to share in the economic boom that has come with a rise in world oil prices not seen since the 1970s. It hoped that would help to iron out some of the country's huge disparities of wealth.

This rosy scenario of shared wealth ended badly after the Saudi Arabian Capital Markets Authority ("CMA") engaged in a ham-handed attempt to regulate speculative excesses:

The March 14 plunge was a severe reaction by speculators when the CMA decided to impose a daily price movement band of 10 percent.

The April 11 crash was a response to the CMA suspending two dealers on suspicions of market manipulation.

The lack of corporate transparency, small-time and first-time investors’ ignorance of the fundamentals of investments, and the long-term phenomenon of unmonitored margin lending by banks were some of the other factors that aggravated the plunge.

The resulting 50% crash produced a pretty ugly looking chart for the Tadawul Market Index:

Market strategists have also theorized that the Saudi crash put pressure on the US markets:

A lot of the selling in the U.S. stock market over the past two weeks was sparked by hedge funds invested in Saudi Arabia, said Jeffrey Saut, market strategist for Raymond James & Associates in St. Petersburg. He said the funds needed to raise cash, but their Saudi positions were illiquid, so they sold U.S. stocks instead.

Saudi investors are understandably upset:

Saudis hit by a recent stock market crash are resorting to car stickers to vent their anger at the wealthy speculators who have been blamed for the decline. The English-language stickers reading "Big Thieves!" show a stock market ticker and the names of some popular listed firms. [...]

The stock market crash, which affected more than 3.5  million middle income investors, has delayed the marriages of many people this summer, Asharq Al-Awsat newspaper reported. Every summer, tens of thousand of Saudis get married but this year, the number is expected to drop by more than 50 percent.

Saudi King Abdullah has a surefire plan:

BBC: Saudi King Plans "Risk-Free Fund" - Saudi Arabia's King Abdullah plans to set up a risk-free investment fund in a bid to attract small investors to the country's flagging stock market.

Saudi citizens will be able to invest up to 500,000 riyals ($133,000; £70,600), in the bourse - buying and selling on the market for two years. The individuals can keep any gains but the state will absorb losses.

King Abdullah did not give a starting date for the scheme - which could attract up to 3 million investors. However he said he was "determined" to implement it.

"The fund will be for people of limited income, employees and others...this group matter most to me," he said. "If they win then this is their luck, with God's will, and if they lose, then their capital is preserved with us," the monarch said.

Ah, it's nice to know oil dollars go to such productive uses. The BBC was kind enough to also note that the mass disruption of a market crash could increase the possibility of repercussions both within and beyond Saudi borders:

"Poverty and unemployment affect terrorism and instability and the king knows the result of this decision, which has important political significance"

I find this all very interesting, and it's suprising how little coverage this got in the US press - so much for those "efficient markets for information" that the internet is supposed to create.  - Ed

Comments

[aftab]

he has taken amaculate steps to boost the investors

[Math]

Interesting, I read a an aftermath assessment on http://www.gulfeconomist.com. But I think it's pretty safe to assume that one should never invest more than a small fraction of one's income in GCC markets. It’s simply too volatile.

[Dr. James I Hicks, D. D.]

I would like to invest in the Saudi stockmarket when things are moving up.

[Kamil bahay]

please inforemed where was the bottom for the Saudi Arabian tadawul.
thank you kindly.
Kamil Bahay