‘Under-represented’ Saudi Arabia is the new China for investors hunting growth

With Russia under numerous sanctions and China losing its allure due to an economic slowdown, some investors are starting to view Saudi Arabia in a new light

The increased interest helped the Saudi Exchange rally more than 11 per cent this year, more than double the return of the US-based MSCI benchmark

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Published: 8:20pm, 20 Dec 2023

Throngs of consultants wearing Western attire have become a common sight in the lobbies of Riyadh’s plushest hotels as Crown Prince Mohammed bin Salman embarks on a multi-trillion dollar plan to wean Saudi Arabia off oil. In recent months they’ve been joined by another cohort of besuited individuals: fund managers, keen to get an early foothold in the next big emerging-market growth story.

The kingdom, which only joined the MSCI Emerging Markets index in 2019, has historically attracted very little from the billions of dollars that stock investors allocate to global stock markets. Fund managers were put off by the lack of liquidity in the Tadawul All Share Index, which limits full foreigner ownership, and by the nation’s over-reliance on fossil fuels.

Now, with Russia sanctioned out of the benchmark index and China losing its allure due to an economic slowdown, some investors are starting to view Saudi Arabia in a new light, attracted by a steady stream of reforms designed to encourage more foreign investment and the vast sums being thrown at MBS’s Vision 2030 transition plan.

Saudi Arabia now feels like China in the noughties

Fergus Argyle, co-portfolio manager at EFG New Capital

The increased interest has helped the Tadawul rally more than 11 per cent this year, more than double the return of the MSCI benchmark.

“Saudi Arabia now feels like China in the noughties,” said Fergus Argyle, who helped launch a new emerging-markets fund for EFG New Capital two years ago that has an 8 per cent allocation to the Saudi stock index.

Argyle says Saudi Arabia is still “very under-represented” in investor portfolios even after the Tadawul index attracted net foreign inflows of over US$3 billion this year. That’s a fraction of the US$24 billion that poured in when the index joined the MSCI benchmark four years ago, but analysts say the volume will grow as reforms get under way.

The Saudi bourse is the biggest and most liquid in the Middle East and is home to the world’s largest oil producer – Saudi Aramco – after it raised almost US$30 billion in a 2019 share sale. Over the past few years the exchange, traditionally dominated by banks and petrochemicals firms, has added large healthcare, retail and power companies. The Tadawul trades at 12-month forward price-to-earnings ratio of 17.5 times, giving it a premium of over 50 per cent to the MSCI Emerging Markets Index.