Porcelain Jubilee: 20 Years of Transformation

The Capital Markets Authority (CMA) in Saudi Arabia recently celebrated its 20th anniversary, marking a momentous occasion for the region's youngest regulator. While celebrating this "Porcelain Jubilee," it's also apt to reflect on the remarkable progress Saudi has made compared to two other darlings of institutional investors 20 years ago: Egypt and Kuwait.

Imagine stepping back in time to 2003. The Saudi market was a fledgling compared to its current form. With barely 100,000 registered trading accounts, it operated as a plain vanilla cash market, reliant on T+0 settlement and devoid of an independent custody structure. Tradeable indices? Foreign access? Forget it. The landscape was dominated by banks, and sophisticated financial instruments like shorting, futures, and programmatic trading were non-existent. IPOs were scarce, market manipulation controls rudimentary, and transparency minimal. Annual reporting resembled cryptic Arabic statements printed in miniature in the morning papers – magnifying lenses were a must! Orders were limited to simple market and limit instructions, and the fledgling Tadawul hadn't even achieved Frontier Market status.

Fast forward two decades, and the transformation is nothing short of breathtaking. Saudi Arabia now boasts the 5th or 6th largest Emerging Market (EM) crown, proudly sitting amongst the G20 giants. It attracts the largest cohort of foreign investors in the region, both public and private, and stands as the only market in the region to harbour active participation from global financial powerhouses like Goldman Sachs, Morgan Stanley, and HSBC. DVP/RVP trading is the norm, programmatic trading thrives, and liquidity steadily climbs. Most importantly, Saudi achieved the unprecedented feat of bypassing Frontier status entirely, landing directly in the coveted EM realm. Today, it ranks as the 6th largest EM, eclipsing established names like Mexico, South Africa, and Thailand.

This meteoric rise hasn't exhausted the orchard – Saudi, arguably, presents one of the most enticing EM opportunities globally. The "low hanging fruit" of progress has yielded sweet returns, and plenty of ripe apples remain for the picking.

Now, let's rewind to a contrasting picture: Egypt in 2003. With nearly 20 names gracing the MSCI EM roster, it found itself under the watch of the same portfolio managers who navigated the waters of Greece and Turkey. Having weathered the storm of a historic devaluation (2001/2) under astute technocratic leadership, the country exuded an air of outward-looking economic and trade potential. It was regularly touted as one of the top EM investment destinations, witnessing a currency appreciation from 7.5 to 5.7 EGP/USD between 2003 and 2008. This vibrant era attracted global heavyweights to its shores, eager to tap into the potential of telcos, cements, banks, and fertilisers in the MENA region's crown jewel.

However, this renaissance proved tragically short-lived. The double whammy of the financial crisis and the Arab Spring dealt a devastating blow, ushering in an era of decline and irrelevance. With the technocrats ousted and a military despot at the helm, Egypt's EM allure faded into dim memory. Today, it remains in EM only as a legacy, with only 1 listed company meeting broad EM inclusion criteria; and even that lone survivor will ultimately capitulate as devaluations continue into the foreseeable future.

The continuously weakening Egyptian Pound has arrested most economic development, as well as reduced remittances by Egyptians abroad. Capital controls have stifled local spending, with the only exceptions being direct investments in real estate and the stock market – both artificially propping up prices in EGP. Sadly, the conflict in Gaza has improved El Sisi’s political position internally, with security trumping the economy in the short term, and alleged billions being funnelled into the country to maintain elements of the status quo at the Rafah border.

Across the Arabian Peninsula, Kuwait in 2003 presented a contrasting picture. It reigned as the GCC's most active market, renowned for its forward-thinking approach and sophisticated investor base. The Kuwait Investment Authority (KIA), established in 1953, held the esteemed title of the world's oldest sovereign wealth fund. Its largest blue chip financial institution, National Bank of Kuwait, was endearingly termed the Goldman of the Middle East. In terms of politics and governance, it was ahead of its time in the GCC, with a meaningfully influential parliament, and one of the most diverse ministerial rosters globally.

However, while Saudi Arabia soared, Kuwait's trajectory diverged. Regulatory hurdles, a risk-averse culture, and limited economic diversification weighed heavily, leaving the once-vibrant market struggling to keep pace with its ambitious neighbour. Today, while Kuwait continues to be investable, there is a distinct shortage of attractive opportunities available to fundamental investors, made all the more poignant when meeting companies on the ground, as C-suite executives are more often interested to discuss the merits of investing in Saudi or the UAE.

The stories of these three markets offer a compelling lesson in the dynamic nature of economic and market progress. While initial promise doesn't guarantee sustained success, decisive reforms and visionary leadership can propel seemingly nascent markets to dizzying heights. As Saudi Arabia celebrates its Porcelain Jubilee, its future appears dazzlingly bright, with the potential to continue outshining its former regional peers. The low hanging fruit has been savoured, but a bountiful harvest still awaits – a testament to the transformative power of ambition and strategic execution. Egypt and Kuwait, 20 years ago, may have been the darlings of foreign investors, but driven by poor leadership and weak long-term thinking, both have lost their lustre. The former has become uninvestable despite real fundamental potential. The latter’s black-box status has only darkened, and with the apparent lack of economic top-down zeal, it has become uninteresting to investigate further for many investors.