How to Invest in Saudi Arabia
Saudi Arabia is best known among investors for its tremendous oil industry, with approximately 260 billion barrels of oil reserves comprising roughly one-fifth of the world's supply. 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 relatively wealthy nation. Here is a look at Saudi Arabia's economy, major stock exchange, and some options for U.S.-based investors to take positions in its companies.
Tadawul: The Saudi Stock Exchange
Tadawul is the only securities exchange in the country and is supervised by the Capital Market Authority. With approximately 150 listed companies, the exchange is heavily weighted towards the financial services and energy industries but includes many other sectors. In aggregate, 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 rose to more than 11,000 before falling to its current level at around 7,103.52 (May 2012). While movements are largely tied to oil price fluctuations, it's important to note that Saudi Aramco isn't a component.
Saudi Aramco & 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 $781 billion in 2005, 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.
Pros & 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. And 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 Government - 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. As of early May 2012, the only options for investing in Saudi Arabia have been Middle Eastern ETFs, such as the SPDR S&P Emerging Middle East & Africa ETF (GAF). But Van Eck recently announced that it might launch two pure-play ETFs for the country.
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