06/09/2015
6 Factors attributed to the stock market plunge
Saudi Arabia’s main Tadawul all share index closed at 8437 points yesterday, losing 26.8 points. The shares of 117 companies has declined. Hussein bin Hamad Al-Rugaib attributed this to the the unstability of the stock market during the past two months. Three factor had a direct impact on the market, oil-prices dropping after the nuclear deal between Iran and world powers, which in turn has left the sanctions on Iran and allowed it to export oil. He said, «This Agreement caused a decline in oil prices by about 26% and the loss of about $ 17 per barrel. Moreover, the surplus of the oil supply was an effective factor. As shale oil is vastly growing and it seems that its extraction costs has dropped significantly, where oil experts were betting on the futility of shale oil extraction given that oil prices has reached $ 50 a barrel. However, the data for the past weeks showed that drilling rigs has increased in spite of oil prices dropping to less than $ 50, which means that there are economically feasible under these prices. »
The second factor was the decline in corporate profitability during the first half of 2015. The listed companies has lost about 14% of its profits compared to the same period of the previous year. Petrochemical companies had the strongest impact on the market. Banks had contributed to stabilizing profits thus; the profitability of the sector had grown by about 7%, and added profits to the market that were estimated at around 1.5 billion.
The third direct factor was lack of liquidity. This lack of liquidity contributed significantly to the decline in the market. It recorded its lowest level last Thursday, at 2.9 billion riyals. Issuing government bonds in the coming months to might cause withdrawing liquidity from the market.
Other indirect factors are the Greek debt crisis, which is one of the most important factors that contributed to shake investor confidence and caused anticipation and fear of what will come out of this crisis. Some analysts had predicted some scary scenarios, but the euro countries are over this crisis, since they had granted being Greece some facilities and imposed new strict conditions for reform. The second factor that influenced the market indirectly was China. The Chinese market entered a phase of inflation in stock prices, which induced sidelines sales. Moreover, perhaps the fact that 80% of the dealers in the market are individuals has contributed to the random unjustified price upsurge. The Chinese government had tried to support the market by injecting more funds, cutting interest rates and lowering reserve requirements for banks to provide more liquidity but all that was in vain. Usually, government support for the stock market does not help when the market is plunging. The final measure was from the Chinese central bank, it reduced the price of the yuan 3 times during Last week, to support Chinese exports. Another factor that has contributed indirectly to the market decline in the geopolitical events in the region and the spread of violence and bombings. Such events cause concern among investors, especially foreign investors who are looking for security and stability.
For his part, Anas Al-Rajhi (capital markets analyst) said that In the past, the nominal value of shares was 100 Saudi riyal. It was then split to 50 riyals, then in 2006 to 10 riyals, which is the current nominal value. Currently, there is talk about reducing the nominal value of stock to one riyal, but there is no official announcement yet, such decision might be made or cancelled according to the market’s conditions and prices. If it was decided it would be implemented in phases, the market might be closed periodically, as it happened in 2006.
It is worth mentioning that this stock split does not change anything from the financial aspects. multipliers and the percentage of revenues and market value is the same as the rest. Most of the changes are of a psychological nature. It will enable investors to buy stocks at low value that suits most members of society. That in turn will bring some sort of justice and will work to increasing the depth of the market by raising the amount of traded shares and creating some kind of stability. It will reduce large speculators chances of manipulating and retaining large quantities of stocks as well as damaging to small investors. Especially since lack of supply of stock works, helps exploit and harm to investors. In addition, reducing the nominal value of companies will facilitate the entry of many companies to the stock market, thus increase the supply of stocks of successful companies.
As for the temptations for investor or speculators, it depends on investor’s mentality and state of mind. Some investors consider falling prices as an investment opportunity, since the returns of stock will be higher and multipliers will fall, if we assumed that companies would sustain its profits or attain some growth. Companies’ performance vary, and if we take into account the future contracts that price its shares in accordance with the expectations, the speculator is interested in increasing , market activity, and higher volatility of the shares which is what he is missing.
He said that the this rush to sell would definitely cause some sort of panic, that is why we see some stock falls and some prices fall to less than their fair value. It is due to the arbitrary sale e without regard to the company’s financial indicators. Big investors pressuring the market has been excluded, since the market and stock prices all are priced according to multipliers and future expectations. That is consistent with the current circumstances and the effecting factors, like the falling oil prices and earnings affected by petrochemical companies and its impact on the government budget. It may cause a deficit that may affect the level of government expenditure, thus, corporate profits.
