Small Saudi stocks, selected by “Standard & Poor’s Dow Jones” and some qualified for foreign investment, achieved combined gains in their performance by the end of 2020, compared to the performance of their peers in global markets.
The monitoring unit of the reports in Al-Eqtisadiah showed that the S&P index for measuring the performance of Saudi small-cap companies achieved record gains of 25.77 per cent, compared to 16.16 per cent for the Standard and Poor’s International Index for measuring the performance of small cap stocks.
The Saudi supremacy came after the wave of optimism that swept over traders as a result of tightening Saudi control over the pandemic and initiating the introduction of Covid-19 vaccines, in addition to the strong growth of the non-oil private sector, in addition to the new liquidity flowing continuously to small companies regardless of their financial results. .
The annual gains for small Saudi stocks came despite the international S&P index and its counterpart for developed markets achieving their highest close in nine years.
Standard & Poor’s Dow Jones – the global provider of indices – manages several main and sub-indices for the selected Saudi stocks. The number of companies varies according to the type of index.
Monitoring the reports unit in Al-Eqtisadiah newspaper showed that 82 Saudi companies pushed the Kingdom to rank 27th in the world in terms of weight in the S&P International Index for small-cap companies out of 50 developed and emerging markets and 9,195 publicly traded companies.
The market value of the selected Saudi companies exceeded their counterparts of the same size in the Norwegian, Irish and New Zealand markets.
Companies operating stock gauge indexes select specific stocks so that asset management companies can evaluate the performance of equity funds, some of which are based on the FTSE or MSCI market indices. The more diverse these indices and their characteristics, the more asset management companies can offer new funds that track the performance of those indices.
The historical data of the company that owns the index of Saudi small companies indicates that it achieved the highest closure in five years and five months (65 months), after closing at 130.5 points by the end of December. Knowing that its highest close in ten years was at 162 points in 2014.
Speculation and investor appetite for small Saudi companies contributed to the rise in their market value to $ 69.2 billion, according to the S&P index data for small-cap companies in the Saudi market.
The total return on investment in Saudi small companies (25.77 percent) is the highest in nine years, compared to the negative index returns of 14.6 percent in 2015.
Therefore, it was not surprising that the performance of small stocks in the local stock market outperformed the performance of small Asian stocks as well as their counterparts from developed markets, according to the data of the S&P Dow Jones indices.
The index that tracks the performance of locally listed small companies in the Saudi market has become among the best performers in emerging markets, as its annual gains were close to those of the same index that measures the performance of small Chinese companies that achieved gains at 27.9 percent thanks to China’s strong economic recovery from the epidemic. .
Private sector growth
The Saudi Arabia PMI index of the IHS Markit financial data and analysis platform revealed that the non-oil private sector in Saudi Arabia witnessed strong growth during December, driven by a significant increase in production and the fastest increase in new business. For a period of 12 months, while companies direct spending to purchases of production inputs.
The seasonally adjusted Saudi Arabia’s main PMI rose to its highest reading in 13 months during December 2020, and rose from 54.7 points in November to 57 points last month, as there was a significant improvement in business conditions, in addition to However, the index expanded for the fourth consecutive month, and was broadly consistent with its average level of 56.9 points.
The PMI is a single-digit composite index that monitors the performance of the non-oil-producing private sector. It is derived from the indicators of new orders, production, employment, supplier delivery times, and inventory of purchases, and a reading greater than 50 points indicates an overall improvement in the sector.
The rise in the main index was driven by the noticeable increases in each of the sub-components of production and new orders, after the latter witnessed a sharp rise.
It is noteworthy that the PMI reports prepared by IHS Market economists are very influential in global markets and have a clear impact on market movement (including stock markets), as such reports are issued to a few Arab countries, including Saudi Arabia, the Emirates, and Qatar.
According to the press release, Al-Eqtisadiah received a copy of it, that recent data indicate the fastest recovery in new business over a year, which the committee members attributed to the improvement in market demand and price cuts from some companies, as the sales growth was largely driven by demands. Domestic demand, as the demand for exports increased only slightly.
As a result, companies raised their production levels for the fourth consecutive month last month, and at the fastest pace since November 2019, in addition to the incoming orders. The companies participating in the study indicated that the ongoing projects also increased their workload during the month.
Business expectations for 2021 have improved further, as optimism has strengthened over the global spread of emerging coronavirus vaccines, and aspirations that this will lead to a strong recovery in economic activity, and the degree of optimism has risen to its highest level during 2020.
Higher sales and improved optimism led companies to sharply raise their purchasing activity and input stock in December.
The prices of production inputs did not change last month, thus ending a five-month series of inflation, while the average prices of products and services rose at a slower pace than they did in November.
Standard & Poor’s Dow Jones Indexes
The Saudi stock market for “Standard & Poor’s Dow Jones” indexes, the global provider of indices, was included in two stages, in March 2018 and September 2019, at 50 percent for each stage. The Saudi Stock Exchange (Tadawul) was promoted to an emerging market after it was an independent market at S&P Dow Jones.
The company explained that the promotion of the Saudi market has been under study for several years, due to the size of the market, liquidity, Saudi Arabia’s economic and regional importance, and the progress it has made in allowing foreign investors to invest in the market.
“Standard & Poor’s Dow Jones” stated that the initial public offering of “Aramco” has attracted the interest of foreign investors significantly, which reinforced the need to change the Kingdom’s classification.
S&P Dow Jones added, in a statement at the time, that the Saudi upgrade came as a result of continuous consultations with market participants and global investors, in addition to positive reforms in the market infrastructure that support foreign investment.
It is known that Saudi companies are now present in several indices, including the S&P Global BMI Index, the S&P Global BMI Shariah Index, and the S&P Global Market Index. P / IFCI Composite & P / IFCI Composite, Dow Jones Global Index and Dow Jones Global Islamic Market Index.
In May 2018, Standard & Poor’s Dow Jones tackled the expected weights of the Saudi market with its benchmark emerging market index, which it estimated at the time at 2.57 percent. The weight of the Saudi market, if it is fully included in its global index, is estimated at 0.28 percent. 116 companies were listed on the Saudi Standard & Poor’s indices at that time, and the market value was at levels of $ 450.20 billion.
As usual, index companies, which are tracked by investment funds, add listed companies through weights reviews that take place quarterly or semi-annually, based on the index. Standard & Poor’s Dow Jones managed several financial icons in the world of financial market indices. One of them is the “Dow Jones Industrial Average”, an industrial index of the 30 largest American industrial companies on the New York Stock Exchange. It was created in 1896, and the Dow Jones Index is the oldest index in the world. It also manages the S&P 500 Index, which includes shares of the 500 largest US financial companies from banks and financial institutions.
A new methodology for comparing performance
Indicators for measuring the performance of entities listed on local and international stock exchanges are the preferred choice for global asset management companies to measure the performance of a specific class of ETF or stocks – for example small-cap companies – with their counterpart in the same class in another geographic region. This is in place of the traditional method of measuring the performance of the stock market as a whole, whose movement varies according to the small or large size of the market or the number of companies listed in it, and their market value, which varies from one market to another.
Therefore, stock performance indicators, such as “FTSE” for example, or “MSCI” for market indices, created a new market by creating the appropriate environment, or platform, that enabled asset management companies to launch investment funds specifically tailored to measure performance. A specific group of stocks that are related to several common factors, being specialized in the real estate sector and highly liquid, in terms of circulation, and foreign investors are allowed to invest in them.
Thus, the investor can measure the performance of Saudi companies with large capital with their counterparts from other global markets that share the same features, which makes the comparison of measuring the performance of these companies, between two geographical regions, more logical and realistic compared to the traditional methods used by some traders and which lack tools Benchmarking between two different exchanges.
An index is defined as a statistical measure, usually of a price or a quantity, and is calculated from a representative set of underlying data. The most common role of an indicator is as a guiding standard, and it can be described as the standard by which the performance of a financial instrument can be measured. Through this role, the index provides a way to measure the performance of a specific segment of the financial market, such as comparisons within a geographic region, an industry sector, or other assets.
The opening of the Saudi stock market for the investment of qualified foreign financial institutions is not aimed at bringing capital or injecting liquidity into the financial market, but rather aims to achieve a number of long-term goals, according to the Capital Market Authority.
Institutional investment will in turn support the stability of the market and reduce market volatility, by attracting specialized investors who add their expertise to the local market, and whose investment goals are long-term.
Foreign investment contributes to transferring knowledge and expertise to local financial institutions and investors, and raising the professionalism of participants in the Saudi financial market by attracting high-level specialized professional expertise.
Among the objectives are also to raise the performance of listed companies, especially in the aspect of disclosure of financial information, as well as to raise the performance of specialized investment companies. Joining foreign indices contributes to raising the level of research, studies and evaluations that are conducted on the market in general and listed companies in particular, thus providing all dealers with more accurate information and fairer assessments. Markets in which there is a large segment of the institutional investor category are characterized by the low level of price volatility.
Corporate balance sheet
When analyzing the financial performance of each company, investors look at the balance sheet, which is like a financial statement that reveals the size of the assets, its financial liabilities, and the shareholders’ equity after the end of each fiscal quarter. Together, these data contribute to calculating other mathematical rates, or what is known as financial analysis ratios, such as the rate of return and the proportion of debts that must be repaid, as the data of the financial analysis ratios contribute to the analysis of the company’s creditworthiness and the evaluation of its financial position by the donors of the financing lines.
These financial statements are more valuable to the investor when previous budgets are grouped together, with the aim of enabling the trader to know the company’s trends in various items. For example, the balance sheet provides a window for the investor to know the company’s ability to pay dividends to shareholders by looking at the item of the available cash amount. On the other hand, operating income has become the indicator that gives the real performance of the company, which comes by deducting sales costs and all operating expenses from the total revenues.
As for the income statement, it presents a summary of the company’s revenues and expenditures during a certain period of time. The financial statements provide a clearer picture of the company’s profitability or not. That is, this combined data leads to the evaluation of the company’s financial performance and the determination of growth prospects. Whereas, loan donors focus on the company’s cash flows and whether they generate sufficient income to pay off the interest on debts owed by them. These data also contribute to enabling investors to make comparisons of financial performance with the company’s competitors from the same sector.
Companies do not distribute all their profits to shareholders, but rather deduct part of it to be within their reserves or to invest it by expanding their activities and business, as investors look at the profit per share index (net income divided by the number of issued shares). This indicator shows how much shareholders would have earned for each share they owned for a certain period of time.
Economic Reports Unit