THE SAUDI STOCK MARKET: VIGNETTES FROM THE EP

C O N F I D E N T I A L RIYADH 009474 SIPDIS SIPDIS DHAHRAN SENDS PARIS FOR ZEYA, LONDON FOR TSOU E.O. 12958: DECL: 12/21/2015 TAGS: ECON EFIN PGOV SA SUBJECT: THE SAUDI STOCK MARKET: VIGNETTES FROM THE EP REF: A. RIYADH 9434 ¶B. RIYADH 4972 (NOTAL) Classified by Consul General John Kincannon for reasons 1.4 (b) and (d). ¶1. (SBU) Mohammed Al-Jassim, a prosperous Dammam businessman whose main commercial interest is as a wholesale trader in air-conditioning products, chooses stocks in the same way that many Saudis do: by buzz. "If someone calls me up and says, 'Hey, have you heard about this stock, it's definitely going up,' I might even buy it. If another person tells me the same thing, I definitely will. Then it goes up, I make a profit, and I sell." Asked by EconOff if he even considered investigating the underlying value of the company, Al-Jassim said no. "Why should I? It's all about what people think." When EconOff pointed out that it would be easy for someone to manipulate the market by investing in a stock, then hyping it to his acquaintances, and then selling, Al-Jassim nodded enthusiastically. "That's happened already in Riyadh," he said, describing a scheme in which six wealthy investors had colluded. According to Al-Jassim the first bought 500 million riyals of a particular stock at, say, 100 and sold it to the next person at 110, who sold it to the next at 120, etc. The last person sold it to unsuspecting members of the public, who by then were convinced that the stock was a winner. ¶2. (SBU) While Al-Jassim did not seem at all perturbed at risking his money in the stock market, he expressed some concern at the practice of his customers, small and mid-sized retailers. These customers, he said, received his product on credit and then sold it to their individual customers for less than they promised to him in order to play the stock market. "They want the cash fast, so they buy from me on credit for 100, sell for cash at 90, and put the 90 into the stock market," he said by way of illustration. Another Eastern Province (EP) businessman, Khalid Al-Qahtani, told the CG that he was having difficulty collecting debts from small and medium sized enterprises (SMEs) that owed him money. "They all delay paying to put money in the stock market. They think it will go on forever." Both Al-Jassim and Al-Qahtani were concerned that, if the stock market stagnated or dropped, they would not be paid back by their customers and many SMEs might be wiped out. ¶3. (C) The Dossari brothers (ref A),major investors in the Saudi stock market although not day traders like Al-Jassim, acknowledged that some companies were quite overvalued but argued that the larger Saudi companies were priced reasonably given current oil prices. "All the companies with high price to earnings ratios are small market cap companies," Yousef Al-Dossari argued; "the big market cap companies are a little bit high, but still OK." The brothers said that so many Saudis hold equity in the stock market that the government recognized a national security dimension to stock prices. "If the market plummets, people will blame the government, and the government knows the extremists would take advantage of it," Yousef said. His brother Khalid noted that the government owned 80 percent of the shares in the market by value via retention of shares in what were entirely state-owned companies like SABIC or via various public investment funds like that for social security. "Because it controls so much of the market, the government can easily intervene to stop prices from falling," Khalid continued. The brothers thought that the government might sell shares of companies like SABIC and Etisalat in several years, after the market had settled and matured. ¶4. (C) Comment: As noted in ref B, the Saudi stock market is booming, and valuations of many companies appear to reflect the momentum of the boom rather than fundamentals. Al-Jassim's method of selecting stocks, to the extent it is representative, illustrates how momentum, rather than value, is key. The concern of Al-Jassim and Al-Qahtani, that small business owners might default if the market flattens or drops, suggests the extent of Saudi exposure to the market and the economic implications of a sharp fall in share prices. The perspective of the Dossari brothers, that the government sees the market partly in national security terms and has the ability and will to stop a potentially devastating collapse, merits closer assessment. End comment. (APPROVED: SPEIDEL) GFOELLER