By Matein Khalid: Chief Investment Officer and Partner at Asas Capital
It was the best of times, it was the worst of times. Charles Dickens’s chronicle about Paris and London at the time of the French Revolution in the 1790’s captures my feelings about the Arab capital markets in 2019. The best of times? Saudi Arabia issued $12 billion in Aramco Eurobonds that were oversubscribed ten times in the global capital markets.
Saudi Aramco’s blowout success with the Saudi Aramco IPO on the Tadawul, up 20% in its first two days as a public company, was history’s largest listing (state sanctioned leveraged IPO), stunned the Middle East and a sceptical Western world. Yet the euphoria in the Tadawul contrasted in real time with a banking, currency and sovereign debt meltdown in Lebanon. Bloody civil wars in Syria, Libya, Yemen and Iraq take their toll in human slaughter as I write.
Dubai home prices fell 10% in the fifth year of a property bear market and property developers profits fell 85 – 90% from their peak, as did their share prices. Algeria and Sudan were paralyzed by anti-regime street protest and palace coups within the ruling Praetorian elite. Geopolitical tensions with Iran escalated after Ayatullah Khamenei’s Revolutionary Guards mined, sabotaged and seized foreign flag oil tankers in a bid to disrupt the maritime chokepoints of the Straits of Hormuz and Gulf of Oman after the Trump White House’s “maximum pressure” sanctions strangled Iran’s crude oil exports. The Qatar embargo continued. Turkish combat troops invaded the Kurdish enclave in northeast Syria. The Kremlin invited the leaders of Turkey and Iran to ink a new Sykes-Picot blueprint for the Arab Levant. Israel continued to enforce its mass prison in Gaza and the US moved its embassy from Tel Aviv to Jerusalem in yet another nail in the coffin for a two state solution in Palestine.
The Arab world’s capital markets endured the best of times and the worst of times in 2019. There were seminal milestones in the evolution of the capital markets. J.P. Morgan included five GCC countries in its bellwether EMBI emerging market bond index – and amplified a blowout performance for the Bloomberg Barclays GCC bond and sukuk index, already sizzling after three successive FOMC rate cuts by the Powell Fed. Saudi Arabia’s Tadawul was added to the MSCI EM equities index and is now the ninth largest index constituent with a 2.64% weight, more than Mexico, Philippines and Malaysia.
Egypt continued to make progress in its $12 billion IMF bailout mandated austerity program and inflation’s dramatic fall enabled 500 basis points in central bank policy rates cuts and an almost 20% rise in the Egyptian pound, as the highest interest rates in MENA attracted a tsunami of offshore and diaspora Misri capital. The Nile water dispute between Egypt and Ethiopia on the Great Renaissance Dam threatened to escalate into war even as Ethiopia Prime Minister Abiy Ahmed won the Nobel Peace Prize.
International institutional investors have put more than $23 billion in Saudi Arabian large cap shares before and after the MSCI EM upgrade. Saudi Arabia’s outperformance in the GCC since early 2018 ended with a 15% correction in the Tadawul after May 2019, a recurrent theme in post MSCI EM inclusion countries in the emerging markets.
Then the Saudi Aramco IPO in December once again galvanized the Tadawul with almost $110 billion in bids for the $25.6 billion new issue, bigger than the Alibaba and Nippon Telecom jumbo IPO’s. While Brent crude is $20 below the kingdom’s budget break even oil price and the 2019 State Budget is the most expansionary since King Khalid’s reign in the late 1970’s, Saudi Arabia’s economy has returned to consumption growth, with the Aramco IPO a spectacular win for the Crown Prince’s Vision 2030 reform agenda.
Saudi Arabia will be the most exciting economic diversification, corporate earnings growth, Makkah religious tourism and privatization IPO listing story in the Arab world in 2020 – 21. The Saudi Aramco IPO’s $2 trillion valuation is unsustainable given that peers like Shell and BP offer almost 7% cash on cash dividend yields and a much lower valuation multiple without steeply progressive royalty payouts. A secondary international listing of Saudi Aramco in London or New York will be another vindication of the Vision 2030 blueprint and its quest for the kingdom’s socio-economic transformation.
I expect Kuwait will be the next MSCI EM upgrade candidate, given the scale of its fiscal/capital markets reform and industrial diversification. Kuwait was the pioneer in the Gulf’s sovereign wealth constellation, with the establishment of the Kuwait Investment Authority in the 1950’s. I fondly remember my visits to the Kuwait Investment Office in London in the 1990’s where even young princes of the ruling Al Sabah dynasty were proud to work as equity portfolio managers and analysts. A generation after the $90 billion Souk-al-Manak speculative bubble and Saddam Hussein’s brutal invasion of the emirate in August 1990, Kuwait remains one of the most attractive petrocurrency economies in the emerging markets, with an estimated $500 billion in foreign reserves, low public debt/GDP ratios and a stable, well capitalized banking system that has survived wars, invasion, foreign military occupation, recurrent property busts and regional turmoil. Oil economists estimate Kuwait’s budget breakeven Brent price is only $49 a barrel, a tribute to the fiscal prudence of HH The Amir Sheikh Sabah Al Ahmed Al Sabah.
I have been uber-bullish on Egypt’s stock market since early 2017 due to President Sisi’s structural reforms and removal of fuel/electricity subsidies, something not even Nasser, Sadat and Mubarak achieved. Egypt has made substantial progress in its IMF structural adjustment program, benefited from the draconian Bretton Woods twin mandated November 2016 devaluation and accumulated $45 billion in hard currency and gold reserves.
When I first invested in Egypt in the late 1990’s, in the era of Youssef Boutros Ghali’s privatization mantra and Naguib Sawiris’s Mobinil IPO, Egypt was known as the “Arab tiger on the Nile”. Of course, Herodotus, my boyhood hero, called it “the gift of the Nile” 2500 years ago. There are fabulous money making opportunities in Egypt. My close friend and Asas Capital prop book colleague Ehab Hassan made five times his allocated capital in Egyptian energy stocks after the November 2016 devaluation, a testament to human brilliance and real time market intelligence in the Arab world’s most populous economy, yet where one third of its 100 million people live on $2 a day. Ehab and his generation of millennial financiers will hopefully help change Egypt’s economic destiny, as Alaa (Alan) and Gamal (Jimmy) Mubarak’s charmed Sharm Al Shaikh falool set I knew could not.
Finance Minister Tarek Amer is one of the finest economic technocrats in the Arab world since my old Wharton prof. Dr. Farouk El Okdah, as the dramatic fall in Egyptian inflation and interest rates attests. Egypt is on the path to macroeconomic stability and so I evoke the ghost of the great French-Misri chanteuse Dalida – helwa ya baladi!
I had desperately hoped that Iraq would be the next frontier market fairytale after Baghdad’s rapprochement with Saudi Arabia, UAE and Kuwait but I was proven horribly wrong. An estimated 450 young people have been killed by snipers or masked assassins with butcher’s knives in Baghdad’s Tahrir Square. Who is responsible for this monstrous crime against humanity, against young people who just dared to revolt against a corrupt political class? Iran’s Pasdaran spies and their murderous Hashd Al Shaabi militias, four of whose commanders have been rightly sanctioned by the US Treasury this week.
There can be no investment fairytale in Iraq until the US and its Arab allies finally convince Tehran to respect the sovereignty of an ancient land that has known only horror and tragedy since the murder of its last Hashemite king, the young, doomed Faisal II in July 1958. King Faisal’s last state visit was to Pakistan where my maternal grandfather met him and his entourage in Karachi, our then capital. When Faisal died, the civilized DNA of Iraqi politics died with him and the torture chambers of the Baathist nightmare emerged on Euphrates and Tigris. Turkey, Iran, Pakistan and Iraq were united in the Bagdad Pact in 1958, run by civilized men sworn to defend their societies against the barbarians. Sadly, it is 2019 now and the barbarians won in all five signatories of the Baghdad Pact.
I cannot be objective about the UAE, my second home since 1976, crucible of my boyhood fascination with the Arab world’s ancient culture, society, politics, language, literature, music, food – and, yes, stock markets! 2019 was not bullish for the Dubai Financial Market, Abu Dhabi Securities Market or home prices in the seven emirates (and the eight emirate London, LOL).
Despite the current malaise in the property, construction, banking and retail markets, the UAE remains the most cosmopolitan, most globalized economy in the Arab world, the Singapore and Miami of the Middle East. The Dubai Internet City is the Arab world Silicon Valley (with Amman’s software hubs) and the DIFC is the Arab world’s Wall Street, City and Bahnhofstrasse. The UAE is the Arab world’s ultimate futuristic hub for people, ideas, money, a potential successor to the wonder that was Andalusian Cordoba or the (early) Abbasid Baghdad, the catalyst for a new Arab Enlightenment. That much, at least, is certain.