Summary
- The iShares MSCI Saudi Arabia ETF provides single-country exposure with growth potential.
- Saudi Arabia has a long history of conflict with Iran which remains a key geopolitical risk for your investment.
- As the world slowly reduces their dependence on oil, Saudi Arabia must transform itself for a post-oil world.
Overview
The iShares MSCI Saudi Arabia ETF (KSA) provides diversified exposure to the Saudi Arabian stock market. As at 1 st September 2022, the fund was invested in approximately 100 different stocks which include popular names such as Saudi Aramco – the kingdom's family jewel.
The fund is heavily weighted towards Financials and Materials which represent nearly 68% of the fund’s holdings. It also has a high expense ratio of 0.74% per annum but it is justified given that access to the Saudi Arabian stock market has historically been closed to foreign investors.
Top 10 Holdings (BlackRock)
The fund is managed by BlackRock, which is one of the largest asset managers in the world. BlackRock is known for providing better liquidity than other asset managers due to higher assets under management and therefore higher trading volume in its ETFs.
Liquidity is an important factor to consider when investing in an overseas fund. During stress, it might be difficult to cash out at a good price but I believe the chances are higher with BlackRock.
Risks of investing in Saudi Arabia
Before investing in Saudi Arabia, it is important to consider the investments risks. In this article we will discuss two key risks:
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Geo-political risks which could affect your investment in the region from a macroeconomic perspective
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The country’s dependence on oil income and how it can thrive in a post-oil world
Geopolitical risks
Iran and Saudi Arabia are bitter rivals with a long history of conflict. Iran is separated from Saudi Arabia by the Persian Gulf. Saudi Arabia uses the Persian Gulf via the Strait of Hormuz as its main export route for oil and gas as it is the only way out to the ocean.
At least 20% of global oil supplies pass through the Strait of Hormuz, probably a higher percentage now given the Western-led sanctions on Russia. This is why the Strait of Hormuz is so important. The narrowest part of the strait is just 34 kilometres long which means that Iran can threaten to close the strait.
Due to sanctions, Iran is restricted from selling oil and gas to the US and its allies. Iran has previously threatened that if it can’t use the Strait of Hormuz, then no one should.
Strait of Hormuz (Google images)
If the strait had to close because of Iran, this would cause massive disruption to oil and gas shipments from Saudi Arabia which would involve a loss of oil income for the country and potentially a global recession.
To hedge against it the US has advanced plans to wipe out as much of Iran’s offensive capabilities as they can within hours of a major conflict breaking out.
The Gulf states have also been building pipelines to take oil and gas to the Red Sea. From there, oil tankers can easily access the Indian Ocean.
The risk of conflict escalation remains and is a key risk to consider before investing in Saudi Arabia.
How Saudi Arabia can thrive in a post-oil world
Saudi Arabia became a major player on the global stage because of its fossil energy sources. Oil has made Saudi Arabia wealthy in an oil-thirsty world and is at the basis of the country’s relationship with the world.
However, the world is slowly reducing its dependence on fossil energy and Saudi Arabia will have to adapt to a post-oil world. Although the country is the beneficiary of a massive oil bonanza this year because of the Ukraine-Russia war, the country needs a long-term plan – one called Vision 2030.
So how can Saudi Arabia re-invent itself – a kingdom of oil and sand. Saudi Arabia is actually the world’s largest country without a river and the majority of the surface area is dominated by two vast deserts and therefore mostly inhabitable.
The country relies on oil for everything – from electricity production to water desalination.
However, diversification has begun with Vision 2030. For example, Saudi Arabia has been investing heavily in solar energy. The kingdom has solar radiation levels among the highest in the world which is ideal for producing solar energy.
There have been other projects such as improving women’s access to the workforce, building the entertainment sector (e.g., hosting Formula One races), and developing itself as touristic destination like Dubai in the UAE.
All of these projects have a strong potential to boost the economy and provide a windfall for your investment if it works out.
Conclusion
The fund provides single-country exposure with growth potential. Vision 2030 is an interesting project to ensure that the country’s GDP sector composition is more diversified and has a lower exposure to oil income. The success of Vision 2030 will be beneficial for the fund as it will support economic growth in the country.
However, Saudi Arabia has a long and complicated history with Iran. The risk of conflict escalation remains and is a key geo-political risk to consider for your investment. Also, as the world slowly moves to Net Zero, Saudi Arabia will have to adapt to a post-oil world which remains a long-term risk.
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For further details see:
KSA: A Kingdom Of Oil And Sand