With oil prices expected to stay above $100 this year, robust economic growth, negative real interest rates and a historical lack of correlation with developed equity markets, you would be forgiven for thinking that Saudi Arabia’s stock market should be soaring.

It is not. While most other Gulf equity markets have done well this year, the Tadawul All-Share Index has shed 19 per cent, making it the worst performing market in the region.

The Saudi economy is thundering along on the back of record oil prices and the kingdom is enjoying huge growth in liquidity. But the stock market languishes below half the value of the peak in 2006, after which a spectacular crash wiped about $500bn off the market capitalisation.

Market watchers say it is too early to expect the Tasi to reach the dizzying highs it climbed to back then – it hit an all-time high of 20,634 in 2006 – and many investors are still wary after being badly burnt in the crash.

The index did rally 43 per cent in the last quarter of 2007, but the trend since has been downward, in spite of appearing to offer good value. It is trading at about 14 times estimated 2008 earnings and 13 times estimated 2009 earnings, according to EFG-Hermes. It is currently trading at about 9,000 and remains one of the most volatile markets in the region.

Bankers attribute the poor performance to several factors, in particular the continued dominance of retail investors, who represent the vast majority of trades and are derided for relying on emotion and rumour rather than research and fundamentals. Because of restrictions on ownership, foreign investment is negligible in the $464bn market.

Saudi investor confidence has been damped by soaring inflation and, in some instances, the travails of the world economy, especially plunges in western markets, in spite of the lack of correlation and the oil boom.

But the other factor that has negatively affected performance is a run of large initial public offerings, including stakes in Zain, the telecommunications provider; Al-Inma Bank – which has yet to even begin operations – and Ma’aden, the state mining company.

Many IPOs are pushed on to the market by the government, which sees the stock market as a means to distribute wealth. While this may ultimately help deepen the market, bankers say listings drain liquidity out of the bourse as subscribers deposit cash in banks in order to sign up to IPOs. Listings also add to the market’s volatility: many investors buy and then look to sell rather than hold for the longer term.

Bankers say the government is partly to blame for offering stakes of state-owned entities at par value. Investors see IPOs as a way to make a quick buck, but the resulting share performance is usually underwhelming as Saudis rapidly pull out to book profits, says Fahd Iqbal, an analyst at EFG-Hermes.

Still, there is hope that the market will pick up after the summer, a traditionally slow period throughout the Gulf when investors take profits and head to cooler climates.

“We see fair value at around 10,000 points on the Tasi, and our call is that it will be closer to 12,000 by the end of the year as these [causes of volatility] unwind, and with no more big IPOs expected,” said Brad Bourland, chief economist at Jadwa Investment.

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