Is it Time to Buy Into Saudi Arabia?

Saudi Arabia is well-known for its power as an oil state. Today, however, the desert kingdom is modernizing rapidly, presenting opportunities for investors hoping to take advantage of growth in its emerging market.

One of the simplest ways for American investors to invest in Saudi Arabia is through buying the iShares Saudi Arabia ETF (KSA).

With capital flooding into the Kingdom, has the time come to buy in Saudi Arabia?

Saudi Arabia’s Diversification

For most of the 20th century, Saudi Arabia’s economy was based almost entirely on its enormous oil wealth. Today, however, the country’s macroeconomic outlook is increasingly diversified.

As part of the kingdom’s Vision 2030 plan, enormous efforts are being made to promote non-oil industries in order to create a more stable and dynamic national economy. In 2023, the country reached the critical milestone of 50% of its GDP coming from non-oil businesses for the first time.

One of the key drivers of non-oil growth has been the tourism industry. About 27 million foreign visitors came to Saudi Arabia in 2023, contributing significantly to the kingdom’s overall GDP.

The financial services industry is also developing nicely, with commercial banks in the country now boasting about $2.3 trillion in total assets. This development has been critical in helping the country emerge as a leader in Islamic banking, a market of which it commands a roughly 30% share.

Exports not linked to the oil industry are also becoming a much larger factor in the Saudi economy. Non-oil exports, including both goods and services, accounted for 33% of all exports last year. This is a marked increase from the 26% that was being reported as recently as 2018.

Even in the energy sector, the kingdom is making large strides to remain economically relevant as the world shifts away from fossil fuels.

Saudi Arabia’s geography puts it in an excellent position to become a major solar energy producer. The country is already building the world’s largest solar plant, expected to begin operations in 2025. Solar panel manufacturing is also becoming an important part of the Saudi energy technology mix.

Oil Is Still a Rich Revenue Source

Despite growth in other areas, it’s important to recognize that oil is still a cash cow for the Saudi economy.

In 2022, net oil exports from Saudi Arabia amounted to $311 billion, roughly 35% of all revenue earned by OPEC members. The country’s production-based leadership in the OPEC organization also gives it enormous influence over global oil pricing.

Although greener technologies will almost certainly continue to gain traction over the coming years, Saudi Arabia’s oil revenues are unlikely to dry up anytime soon. Recent projections suggest that Peak Oil, a hypothetical point of maximum worldwide oil consumption before a gradual decline begins, could be as long as 10 years away.

Saudi Arabia boasts the world’s largest proven oil reserves behind Venezuela, a country that has had difficulty in exporting due to crumbling infrastructure and domestic economic troubles. As such, Saudi Arabia is in the best position to meet rising oil demand.

Saudi Arabia Is Becoming a More Attractive Place to Do Business

As part of its attempts to attract foreign investment, Saudi Arabia has also overhauled its legal code to appeal to non-Saudi companies.

Judges in the kingdom previously had broad discretion to decide business cases under Islamic Sharia law, recognized by the Saudi government as the basis for its legal system.

Late last year, however, the kingdom introduced a written civil code for the first time that created clearer guidelines for resolving business disputes.

This legal change adds to what is already a naturally attractive business environment. Saudi Arabia sits at the center of the Middle East and is a major trade hub.

With the physical and financial infrastructure in place to do business with Africa, Asia and Europe, there’s a great deal to like about Saudi Arabia’s place in its region and the world at large.

US Tensions and Oil Price Concerns

Investors looking at exposure to Saudi Arabia should be aware of the possible political risks the country faces.

Though the country enjoys basically good relations with the United States, several issues have arisen in recent years that strained ties between the two nations. Chief among these was the 2018 assassination of journalist Jamal Khashoggi, which undermined US-Saudi relations until a general reset in 2022.

It’s also not yet clear how dramatic Saudi Arabia’s change in business law will be. Though there is now a written framework for adjudicating business disputes, there haven’t been enough cases yet to determine how Saudi judges will interpret and apply the new code. As such, foreign businesses may remain wary until a clearer legal picture based on a body of precedent emerges.

Finally, investors could see weaker oil profits from Saudi Arabia for a time, leading to slower growth. Aramco, the kingdom’s state oil major, reported a 25% year-over-year decline in profits in March. Although the lower result was still the second-highest on record, it may well be the start of a trend of somewhat less profitable oil sales.

Is The Saudi Stock Market a Good Investment?

The Saudi stock market offers the potential to be a very good investment over the next decade as capital floods into the kingdom from aboard and the strengthening rule of law.

KSA is an ETF that gives investors broad exposure to public Saudi companies, and is an attractive play on the kingdom’s promising growth opportunities.

The Saudi economy has averaged 2.6% growth over the last four years, the highest rate in the Middle East. Even with a potential softening from record oil profits, Saudi Arabian companies appear to be broadly attractive

On the downside, KSA is relatively concentrated. Including its cash position in Saudi riyals, the fund’s top five holdings account for 45% of its total assets. With so much concentration, investors are disproportionately exposed to failures among a small group of top Saudi companies.

Ultimately, KSA has the real potential to be an attractive opportunity for investors seeking foreign growth opportunities. Though the runway could be a long one, Saudi Arabia looks to be in an excellent position to produce strong growth economic over many years.

This will very likely raise the share prices of Saudi businesses, resulting in good upward movement for the KSA index fund. Investors who buy the fund can also take advantage of respectable dividends, as KSA currently yields 2.4%.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.