The Saudi stock market has rallied by 17 percent since the start of 2012, added the report from Al-Rajhi Capital.
It stressed that the recent rally in the Saudi market is fueled by investor optimism and a strong performance outlook in 2012.
Commenting on the market's progress, Beshr Bakheet, chairman of Bakheet Investment Group, said:  “It's clear that liquidity is increasing gradually and I believe the rally likely to be sustainable as long as we have solid oil prices level and a growing economy engine, in addition to continuous corporate profit growth that all together put fundamentals valuation at attractive level and keep deriving TASI up.”
The Al-Rajhi Capital report added that the divergence between the Saudi market and S&P 500 during the last month (TASI +10.4 percent while S&P500 was just +1.4 percent) supports Al-Rajhi Capital’s view that retail investors and speculation are driving the market as they seem to have overlooked the global macroeconomic developments.
Al-Rajhi Capital believes that retail investors prefer speculation and are willing to participate on such activity, given the scenario of a market rally and positive news flow. Though retail investors haven't responded to strong profits and cheap valuations in 2011, they have started joining the speculation bandwagon in late 2011.
Since the start of 2012, there has been a huge jump in traded volumes and value for TASI, especially for the smaller sectors like real estate, transport, and insurance. Smaller sectors have reported a 100-300 percent increase in volumes while the large sectors such as petrochemicals and banking sectors reported a rise of 40 percent and 74 percent respectively. Value traded also showed a similar trend with smaller sectors accounting for a sharp rise. This clearly shows retail investors' preference considering that these small sectors represent 8.4 percent of total market cap, while they have comprised 32.9 percent of total value traded YTD.
Positive news flow regarding the debt crisis in Greece and the US industrial data has resulted in improved investor optimism during the last 2-3 months, the report added.