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Emerging Market: Saudi Arabia

An Introduction to our Emerging Markets Series

As you may know, there are different key characteristics that countries must have to be considered an emerging market. Two examples of those characteristics are having a lower-to-middle per capita income or having some sort of regulatory body as well as a market exchange for investment and common currency.  The Morgan Stanley Capital International Emerging Market Index (MSCI Index) is the governing power that categorizes and reports out on new emerging markets. 

The term “emerging markets” is exciting for businesses, as it insinuates higher growth rates and higher opportunity in comparison to developed countries. That being said, emerging markets all see an increased climate for sociopolitical instability and volatility. Every emerging market is plagued by one or more of the following: military unease, social upheaval, natural disasters, price shocks, and other causes that create high volatility.

Now that we have laid out the “science,” we are thrilled to introduce you to our “Emerging Market” blog series! We will use this series to educate on the strengths, weaknesses, opportunities, and threats of the present-day emerging markets. We will dive into the year so far, the political climate, risks, and rewards and finally - the biggest areas of opportunity. 

In our previous emerging markets article, we discussed the business opportunities arising in the South American powerhouse of Brazil. Now, we travel to the Middle East! Specifically, we will discuss Saudi Arabia’s characteristics on the MSCI Emerging Markets Index. Throughout the article, you will find us discussing new business ventures inside AND outside of the oil and gas industry.

An (almost) Year in Review 

In May, Saudi Arabia joined the MSCI Emerging Markets Index, which gives investors the go-ahead to start funneling cash in the form of ETFs into new ventures arising in the country. $14 trillion in investor assets use this index to monitor new opportunities and have already shown interest in the countries potential, with FTSE Russell and S&P Dow Jones purchasing stock in March.

Previously, the Saudi government had largely privatized many of their industries, their two largest being financial and materials. The country hopes to see a widely more diversified index, seeking investment opportunities from industries outside its usual ones. Prior to that, the country had only been open to foreign investments since 2015.

“Saudi Arabia will make up a small part of the index, but it will also be meaningful enough that not taking a bet will still mean taking a bet,” - Todd Rosenbluth, CFRA Research Analyst.

For business owners and financial advisors questioning the validity of investing in a new market, the inclusion in the MSCI and FTSE indices should be a big buy signal signifying the earnestness of the Saudi Arabian government’s interest in diversifying their international presence in this space.

The year is still young, but so far the real USDBRL, -0.0481%  has gained 3.8% against the U.S. dollar, while the popular Bovespa stock index BVSP, -0.04%  has rallied more than 9%. In dollar terms, the Bovespa is up 12.4% so far this month, versus a 6.6% rise for the S&P 500 SPX, -0.49%, according to FactSet. The GDP plateaued in Q1 of this year, averaging at .96% over the last decade. Saudi Arabia is forecasted to see a GDP rate YoY of 1.5% in Q3 and 1.4% in Q4. 

And even with this growth, we see active managers weary to add Saudi Arabia to their portfolios. When benchmarked against the MSCI Emerging Markets Index, of the 115 actively managed stock funds, Saudi stocks only appear in eight, according to T.Rowe and Parametric.

These numbers are forecasted to change rapidly over the next few quarters, with Saudi stock value matching that of Malaysia and Indonesia. 


Government 

Intense criticism of the Saudi government has been a constant in recent years. We will briefly touch on some of the critical moments only in 2018 and 2019 thus far that define the country’s political unrest. 

BBC categorizes the time between 2017 and 2019 the “Rise of Prime Mohammed” in the Middle East.  In chronological order these recent key events illustrate the political unrest in Saudi Arabia: 

2017: In June of 2017, Saudia Arabia leads an air, land and sea blockade in an attempt to encourage Qatar to cut ties with terrorism and Iran. Mohammed bin Salman takes the throne during this time period as well. In addition, 2017 also confirmed the lifted ban on women driving, a huge milestone for the conservative country. 

2018: In April of 2018, after almost 40 years of being banned, public cinema returned to the Saudi people. Fast forward to October, Jamal Khashoggi was killed. His status as an emigre reporte for Saudi Arabia created an outcry across the globe. Fear amongst journalists intensified following the assassination.


2019: Most recently (September 2019), two major oil refineries were damaged in air attacks. The Yemeni Houthi movement claimed responsibility, with the majority of stakeholders (Saudi Arabia, United States, Britain, France and Germany) deferring responsibility to Iran. 


Weighing Risks and Rewards 

Currency Hedge 

According to MSCI, currency offers a competitive advantage for Saudi Arabia against other emerging markets. In 2018, Saudia Arabia outperformed emerging markets with their currency. 

According to the MSCI: “As the Saudi riyal is pegged to the U.S. dollar, U.S. dollar investors were previously unaffected by the riyal’s fluctuations with other currencies. While U.S. dollar appreciation impaired emerging markets in 2018, Saudi Arabia outperformed emerging markets as a whole. Currency was one of the main contributors to Saudi Arabia’s outperformance in 2018, adding 4.3% to performance. From August 2014 through February 2019, the currency factor contributed 2.2% on an annualized basis.”

The currency advantage offers diversification benefits and investors should examine the possibilities. 


Saudi’s Stock Advancement

Saudi Arabia was recently added to the MSCI Inc.’s Index in May of 2019. This decision has been in the works for over 2 years, with the recent completion of the Tadawul to international investors. The Tadawul is Saudi Arabia’s stock exchange that has a weight of 2.8% on the MSCI index. 

According to the Institute of International Finance (IIF), reports show that in the first 8 months of 2019, “foreign equity inflows to Saudi Arabia surpassed those of India and China — ‘which was remarkable given that Saudi Arabia’s economy is just a fraction of the size of India and China.’”


Industries that are low-hanging fruit for expansion into Saudi Arabia 

The above chart visually compares other emerging markets and their highest opportunity industries vs Saudia Arabia’s opportunities for growth. You can see that information technology, one of the most opportune emerging market industries, has no opportunity in the country. Financial services and material goods currently hold the highest potential for growth. 

We will be highlighting a new emerging market every month and we challenge you to think big for your business. If you’re interested in expanding globally or learning more about potential opportunities, please reach out to us via our contact page or email us at hello@castusglobal.com.

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