Saudi Arabia – real reform or more of the same?

Adam talks about investing opportunities in Saudi Arabia, which although one of the most liquid in emerging and frontier markets, has historically been unavailable for global investors to invest in. 

Saudi Arabia

One challenge I like giving global investors is, “Name me a stock market that has almost US$500 billion in market cap and is one of the most liquid of the emerging and frontier markets. It is also attractive on most valuation metrics and has companies that generate good returns, but global investors have historically been unable to invest there.

Most investors struggle to name the market correctly, as closed markets are usually quite small or company fundamentals are poor. The market in this case is Saudi Arabia, and its opening to global investors is a unique situation in the history of emerging markets (see Tables 1 and 2 for Saudi Arabia’s ranking).

Table 1: Top 15 MSCI EM countries ranked by market cap

Country Market cap (US$ billion)
China 7,831
India 1,878
Korea 1,434
South Africa 1,013
Taiwan 957.4
Brazil 843.4
Russia 623.4
Thailand 459.1
Indonesia 454.7
Saudi Arabia 437.4
Mexico 415.5
Malaysia 394.8
Philippines 252.3
Chile 237.5
UAE 224.2

Source: Credit Suisse.


Table 2: Top 15 MSCI EM countries ranked by ADTV 

Country ADTV (US$ million)
China 84,579
Korea 7,748
Taiwan 5,315
India 5,079
Brazil 3,045
Thailand 1,764
South Africa 1,626
Turkey 1,582
Russia 606.8
Saudi Arabia 557.0
Malaysia 453.6
Mexico 428.1
Indonesia 371.8
Poland 249
Chile 158.5

Source: Credit Suisse.

Saudi Arabia’s government recently held a conference in Riyadh dubbed “Davos in the Desert” to promote its reforms (see Table 3); it was attended by most global asset managers and bank CEOs, as well as global business leaders. Contrary to most perceptions, the Saudi equity market is not driven by the price of oil (see Chart 1): historically, the MSCI Saudi Index has an average correlation of only 0.18 with oil prices (with 1 being the highest correlation).

Table 3: Saudi Arabia market reforms 

Date Rule change
June 2015 Final rules for qualified foreign investors (QFIs) to trade equities in the Kingdom of Saudi Arabia (KSA) and QFI investment permitted
June 2016 Minimum AUM for QFI registration lowered from $5 billion to $1 billion
August 2016 Announces adoption and instructions of the book-building process and allocation for IPOs
October 2016 Publishes final rules for trading of REITs on local stock exchange, the Tadawul
December 2016 Announces approval of parallel market (Nomu) listing rules on the Tadawul
January 2017 All listed companies required to shift to IFRS accounting standards
March 2017 Permission of electronic voting for shareholders in general and special shareholder meetings
April 2017 Amends the transaction settlement cycle from T+0 to T+2 and introduces short-selling
May 2017 Publishes draft regulation for investor protection amid class action lawsuits


Chart 1: MSCI Saudi Arabia relative to EM vs. oil prices: The three-year correlation is only 0.18x
MSCI Saudi Arabia relative to EM vs. oil prices
Source: FMR.


There are risks to investing in the Kingdom, as there are for any frontier market, but in my experience, when governments allow more participation in the economy by private businesses and investors, the returns to shareholders can be quite significant. Key to this privatization push is the potential listing of the most profitable energy company in the globe, Saudi Aramco. Obviously, market pundits have focused on the “where” and “when” of the Aramco IPO. Investors have speculated that it could be in New York or London, but another potential option is China (see Chart 2), because China is now the largest global buyer of oil, rather than the U.S. It would be logical to list an IPO close to your biggest customer.

Chart 2: Global oil imports: Who is the bigger customer?
Global oil imports

The missing part of the debate, however, is any “if.” This is a dramatic change from, five years ago, say, when no serious market observer would have predicted an Aramco listing. The Saudis view this IPO as means to drive capital market reforms and do what most emerging market (EM) countries (with many notable exceptions) have done for decades: let global investors drive improvements in state-owned enterprises (SOEs) and improve the economy.

As in most frontier markets, politics is a key factor in the analysis process, and in Saudi Arabia, it’s all about Mohammad bin Salman Al Saud or “MbS,” the 32-year-old Crown Prince, and the planned structural changes set out in his “Vision 2030.” These changes are currently causing some political turbulence as Saudi Arabia goes through the process of a transfer of power. This process is generating many headlines, and Fidelity’s Emerging Market Debt team and I will continue to monitor developments. Low valuations are providing some buffer for this risk, as are low levels of expected earnings growth. Many economic reforms (including reduction of food and gasoline subsidies for consumers) have slowed the economy, so most corporate updates are fairly subdued.

The bottom line: Saudi Arabia is a special situation among frontier and emerging markets, with the only comparable situation likely being the opening of the A-share market in China. Like Saudi Arabia, the A-share market was a large untapped pool of investment opportunities relatively unknown to most global investors, with good levels of liquidity, in a region progressing through structural change. Stock selection will be critical, but alpha-generation opportunities should be available, especially as Saudi Arabia moves toward a potential MSCI upgrade to EM status in 2018 or 2019.

Thanks for reading,

Adam Kutas

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