More Than Just Another Bubble; Saudi Arabia's Market Capitalization Is Now $450 Billion, Larger Than China's or India's

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Byline: Ruchir Sharma (Sharma is co-head of global emerging markets at Morgan Stanley Investment Management.)

Just like the Frenchman who said the Eiffel Tower reminded him of sex because so did everything else, most financial analysts in the world after the NASDAQ boom-bust reflexively dub a sustained rise in any asset price a "bubble." The list runs rather long and includes the "Anglo-Saxon Housing Bubble," the "China Bubble," and the "Commodities Bubble." Now the latest buzz is that the MENA markets--a reference to the Middle East and North Africa--are in the midst of the mother of all bubbles.

The argument is seemingly straightforward. The region's equity markets have risen 500 percent on average over the past five years and are currently 1.5 times the size of their underlying economies put together. Trading volumes have exploded 25-fold during that period, driven more by mom-and-pop investors looking for instant gratification than by long-term institutional investors. In fact, foreign institutional investors aren't even allowed to participate in many of the region's markets, including Saudi Arabia--which now has a market capitalization of $450 billion, larger than China's or India's.

Sociological signs of excess abound as well. At a recent World Economic Forum meeting in Jordan, sessions on investing in the region attracted such interest that even standing room was fully occupied well before any panel discussion began. The place teemed with businessmen who wouldn't put down their mobile phones, even in the restrooms. Finance ministers and oligarchs in the past would use such forums to hard-sell their country's economic prospects to investors, but this time round they wore the "too much money, too little time" look.

Well, is this all--as the popular imagery associated with bubbles goes--about to end in tears? The problem with the bubble talk is that it's become the lazy way of analyzing ebullience in financial markets; in the process fundamental reasons for price appreciation are missed. Most bubbles are based on favorable developments, which over time get stretched to a point that's terribly divorced from reality. This is probably the case with the MENA markets today, where prices have risen absurdly of late, but in reaction to some fundamental change--in this case the first steps towards economic and even some political reform. However, enough analysis hasn't yet been undertaken to distinguish the reform effort from the liquidity hothouse effect.

To be sure, high oil prices have played a major role in generating excess liquidity in the region, which has spilled over into equity markets. …