The Saudi Arabian stock exchange (Tadawul), is planning to enhance transparency and work with research analysts in a bid to attract both local and foreign institutional investors who could revive the depressed market. “We are working on a program with banks and research firms to find incentives for them to cover the largest Saudi companies,” Abdullah Alsuweilmy, chief executive of Tadawul, said Monday at a conference in Riyadh. “The market is suffering from the lack of research,” he said. The bourse is also leaning on listed companies to speed up the disclosure of important corporate news and will roll out new technology to deliver the information to institutional investors, Alsuweilmy said. Saudi Arabia's stock market, the largest in the Middle East, has dropped twice in three years, plunging more than 75 percent since its February 2006 peak. The government floated some of its companies, but when the market tanked, retail investors didn't have the cash, or courage, to lift it up again. There are more than 10 million shareholders in Saudi Arabia - the local population is about 23 million - who account for over 90 percent of trading. These investors have seen their wealth destroyed and are increasingly suspicious of the market. “There has been a horrific transfer of wealth from the poor to the rich,” said Mohammed Bahjatt, a former professor at King Abdul Aziz University who owns an accounting and management consultancy firm in Jeddah. Bahjatt said there is a need to reconsider the role of the stock market in the kingdom, especially the speculative margin trading that is so popular with young Saudis. For market regulators, the wipeout of the local investors is forcing them to look for fresh cash from institutions and foreign investors. Saudi Arabia authorized local brokers to buy and sell swaps of listed shares. The Saudi swaps - which maintain legal ownership of the underlying stocks in local hands while giving investors exposure to the economic benefits - are essentially emerging market derivatives. The idea was to diminish the dominance of retail investors and give more sway to professionals. “Institutional investors do the research before investing and their participation can help guide the market,” said Timothy Gray, chief executive of HSBC Saudi Arabia, the local investment banking unit of HSBC Holdings PLC (HBC). “They can take the steam out of the bubble before it bursts,” he said. Regulators would like to see more investors come in, especially if it could moderate volatility. While HSBC has led the pack by attracting $1.2 billion in foreign money since August, most research shows that the swaps account for less than 0.5 percent of trading volumes. One of the main reasons foreigners haven't entered in greater numbers is because the swaps are derivatives, and many institutional investors have reduced allocations to derivatives and emerging markets as equities around the world plummeted in 2008. “There are many long-only funds that see value in some Saudi stocks but remain on the sidelines because they can't buy derivatives,” Gray said.
