Saudi Arabia is best known among investors for its tremendous oil industry, with approximately 266.5 billion barrels of oil reserves. The country produces roughly 11 million barrels of oil per day, accounting for 11% of the world's total production. While the oil industry's largest player may be largely off-limits to investors, they can benefit from a number of other industries within the wealthy nation. Here are a look at Saudi Arabia's economy and major stock exchange, and some options for U.S.-based investors to take positions in its companies.
- Tadawul is the Saudi Stock Exchange, which has approximately 199 listed companies in sectors like financial services and energy.
- Benefits of investing in Saudi Arabia include strong account surpluses, thanks to its significant crude oil revenues.
- Risks of investing in Saudi Arabia include monarchy government and dependence on crude oil.
- There are several Middle Eastern exchange-traded funds (ETFs) with Saudi Arabia exposure for investors to consider.
Tadawul: The Saudi Stock Exchange
Tadawul is the only securities exchange in the country and is supervised by the Capital Market Authority. With approximately 199 listed companies, the exchange is heavily weighted toward the financial services and energy industries but includes many other sectors. Overall, the index provides investors with fairly well-rounded exposure to the country's economy.
The primary measure of the Tadawul is the Tadawul All Share Index (TASI), which is similar to the S&P 500 in the United States. Since starting in 1994 at 1,282.87, the index has risen to more than 11,000 before falling to around 7,000 by 2012. In 2021, the index has steadily climbed well above 11,000. While movements are largely tied to oil price fluctuations, it's important to note that Saudi Aramco isn't a component.
Saudi Aramco and Saudi Arabia's Economy
Saudi Arabia's largest company is the Saudi Arabia Oil Company, known unofficially as Saudi Aramco. While the company has an estimated value of around $1.74 trillion in 2020, making it the world's most valuable company, it's state-owned and inaccessible to investors. However, there are many publicly traded companies forming an auxiliary market for petrol supplies.
Despite the oil industry's dominance, the Saudi government is actively trying to diversify its economy and promote growth through privatization. Industries like electricity and telecommunications are already being privatized, while new "economic cities" are being designed to encourage new developments outside of the energy industry.
In May of 2012, the country also announced that it would be entering the alternative energy industry in a very big way. The government hopes to create up to 15,000 jobs over the next decade by focusing on solar energy from both solar panel manufacturing and solar farm operation angles.
Saudi Arabia aims to generate 50% of its energy from renewables by 2030 and plant 10 billion trees in the coming decades. The Saudi Green Initiative aims to transform one of the world's top oil producers into "a global leader in forging a greener world."
Pros and Cons of Investing in Saudi Arabia
Saudi Arabia represents a very attractive investment destination when energy prices are on the rise. But some investors question the long-term sustainability of the country's economy given its dependence on a limited resource like crude oil. Whether or not the government's diversification into other industries will work out remains to be seen. Benefits to investing in Saudi Arabia include:
- Significant Capital to Spend: Saudi Arabia regularly runs strong account surpluses thanks to its significant crude oil revenues, which gives the government funds to spend on economic development programs to stimulate the economy further.
- Recent Privatizations: Saudi Arabia's government has taken measures to privatize certain industries, such as electricity and telecom, in order to open up its market to further investment from the outside, particularly in non-energy markets.
Risks of investing in Saudi Arabia include:
- Dependence on Crude Oil: Saudi Arabia derives the vast majority of its revenues from crude oil and other forms of energy, which means that any downturn in the price of crude oil could have significant negative effects on the country.
- Monarchy: Saudi Arabia has a monarchy form of government, where the king combines legislative, executive, and judicial functions; this has resulted in higher corruption ratings by bodies like Transparency International.
Investing in Saudi Arabia
Investing in Saudi Arabia is easiest to accomplish via exchange-traded funds (ETFs) that trade on U.S. exchanges.
Saudi Arabia ETFs include:
- Franklin FTSE Saudi Arabia ETF (FLSA)
- iShares MSCI Saudi Arabia ETF (KSA)
Middle Eastern ETFs include:
- SPDR S&P Emerging Middle East & Africa ETF (GAF)
- iShares MSCI Israel Capped Index Fund (EIS)
- WisdomTree Middle East Dividend Fund (GULF)
- Market Vectors Gulf States (MES)
The two new proposed ETFs include:
- Market Vectors Saudi Arabia ETF
- Market Vectors Saudi Arabia Small-Cap ETF