DUBAI: Stock market trading in Saudi Arabia could slow in coming weeks because of the risk that authorities may crack down on rampant speculation, but the market's long-term uptrend is unlikely to be reversed, fund managers and analysts say. King Abdullah has ordered the Capital Market Authority (CMA) to take action against manipulation of the market, insisting that members of the extended royal family — which has thousands of members — should not be spared if they are implicated, the daily Alsharq newspaper reported on Monday. "With the current return of investors to the stock market, there has been a return of some violations that require investigation and accountability, requiring violators' cases to be looked at by the specialized legal authority," the newspaper quoted the king as saying in an unusual message to the CMA. The report has not been confirmed; a CMA spokesperson declined to comment when contacted by Reuters. However, many investors believe the report may be correct, given the penalties that any publication could face for misquoting the king. The market's spectacular rally over the last several months has lured large amounts of fresh money, and may have encouraged trading abuses by some investors. The benchmark index has gained more than 25 percent from trough to peak over the past four months. Daily trading volumes have multiplied several-fold; on a day late last month, turnover hit a five-year high of 21.6 billion riyals ($5.8 billion). Many of the stars of the rally have been small-capital stocks which analysts say have limited fundamental attraction and are moving largely in response to their own momentum as well as rumors. If King Abdullah is skeptical of the rally, he is not the only one. In late March, the chairman of Jeddah's Chamber of Commerce, Sheikh Saleh Kamel, described the market as a "rigged balloon" and warned that investors could lose their savings chasing overpriced shares, the Saudi Gazette reported. Sheikh Saleh suggested that the government stop banks from lending money to clients for stock market speculation, although there is no sign so far that banks have cut back such lending. The market, which is the largest bourse in the Arab world, crashed in 2006, hurting tens of thousands of Saudis, many of whom blamed the government for not protecting them from the clout of big investors. King Abdullah may be acting to head off any repeat of this scenario. Saudi Arabia escaped major unrest during last year's Arab Spring uprisings in the region, but the government has become more concerned with maintaining social stability. Turnover Fund managers said official displeasure with speculation could cause some big individual investors to cut back on their most flamboyant trading, reducing turnover. But they said a major exodus of money was unlikely. For one thing, it is not clear how effective any crackdown on market abuse by the CMA would be. Proving that trading rules have been violated is difficult in any market, and in the past, Saudi cases have taken a long time to be resolved. In March this year the CMA said a committee had found investor Salam Al-Nuaim responsible for market manipulation and fraud committed in 2007 and 2008. It ordered him to hand over revenues acquired as a result of the violations, amounting to 2.3 million riyals, and imposed a year-long trading ban on him. Also, analysts believe the market is now much less richly valued than it was at its peak in 2006. For example, bank earnings are growing rapidly and the valuations of many bank shares are still in the lower half of their historical ranges. The index tumbled more than 7 percent from peak to trough over the past week, because of weak global markets as well as the Alsharq report, but it rebounded sharply from its lows on Wednesday, ending up 0.3 percent on the day in rising turnover. Banks led the recovery. And some analysts think signs that authorities are prepared to police the market could increase confidence among investors. "In the long run it's a good thing to know they will investigate and go after people - small investors will be much more comfortable," said a Saudi-based portfolio manager who asked not to be identified. Another theory among fund managers is that authorities want to clean up the market and cool it down somewhat in preparation for opening it to direct investment by foreigners. Currently, foreigners can only invest through swap agreements and exchange-traded funds (ETFs), and own just 3 to 4 percent of shares. Saudi regulators have been laying the legal groundwork to open the market and some analysts expect that to happen this year, although authorities have not set a date. "If the market trades 10 percent less and is less volatile, then it is much better than an extremely volatile market," said Amer Khan, fund manager at Dubai-based Shuaa Asset Management. "Fundamentals took a back seat (recently) and the net result is stocks with no fundamental strength skyrocketing, which sends the wrong message if you're looking to open the market to foreigners."
