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July 2018

Saudi Arabia: On the brink of change

Christopher Dhanraj
Head of iShares Investment Strategy
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Saudi Arabia has one of the world’s best performing equity markets year-to-date. But with a number of key events on the horizon potentially impacting Saudi Arabia for years to come, both opportunities — and risks — for investors are in the spotlight.


  • Investor interest in Saudi Arabia may be at an all-time high following MSCI's Emerging Market Index inclusion announcement and ahead of the upcoming Saudi Aramco IPO and Vision 2030 reform agenda.
  • Global exchange traded product (ETP) flows into Saudi Arabian equities have seen a meaningful increase; as the MSCI EM Index inclusion proceeds, further inflows could result.
  • Key risks to monitor include energy prices, geopolitical tensions in the Gulf, and successful implementation of the ambitious reform efforts.


Saudi Arabia has one of the world’s best performing equity markets year-to-date. The MSCI Saudi Arabia IMI 25/50 Index is up 21.5% year-to-date, outperforming the MSCI Emerging Markets Index by 22.7% and the MSCI Frontier Markets100 Index by 27.1%.1

Saudi Arabia has recently outperformed both EM and FM benchmarks

Saudi Arabia has recently outperformed both EM and FM benchmarks

Source: Bloomberg, as of June 11, 2018. Relative performance measures the ratio of the return of the MSCI Saudi Arabia IMI 25/50 Index against the MSCI Frontier Markets 100 Index and the MSCI Emerging Markets Index. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.


Steady inflows prior to MSCI's decision to include Saudi Arabia in the MSCI Emerging Markets Index helps explain the flows and performance, but we are keeping an eye on three other key trends:

Vision 2030: Saudi Arabia has outlined a major reform agenda to overhaul its economy. The “Vision 2030” framework was adopted in 2016 to reduce oil dependence, diversify the economy, improve public services, and increase the privatization of business activities. Among the dozens of national programs underway is the $72 billion National Transformation Plan (NTB), the goal of which is to modernize the economy, improve socio-economic conditions, and boost tourism. Additionally, investors have interpreted a firmer stance against corruption as a potentially positive signal for future governance.

Saudi Aramco: The 5% local listing of the world’s most valuable company, Saudi Aramco, on the Tadawul exchange is a key part of Vision 2030 and will likely have significant implications for investors. After scrapping plans for dual listing in London and Saudi Arabia, the single local listing requires investors to access local Saudi markets for Saudi Aramco exposure. Saudi Aramco’s IPO will also likely reshape the MSCI Saudi Arabia IMI 25/50 Index, which has less than 1% energy exposure currently, and more accurately represent the economy.2 Despite the currently low energy exposure in the index, the Saudi petroleum sector accounts for roughly 87% of government budget revenues, 42% of GDP, and 90% export earnings.3

MSCI EM Index inclusion: On June 20th, MSCI announced it will add Saudi Arabia to the MSCI EM index with a 2.6% weight in two steps, first in May 2019 then in August 2019. The index inclusion comes amid ongoing market reform efforts, particularly around improved market structure. The total 2.6% weight would make Saudi Arabia the 8th largest EM market, however further IPOs of state-owned entities, like Saudi Aramco, could raise the index weight even higher.4

Key risks

Our base case is that tensions between Saudi Arabia and Iran will likely play out through proxy wars in the Middle East rather than a direct conflict. The U.S. has signaled strong support for Saudi Arabia while renewed U.S. sanctions on Iran could further escalate tensions. The other risk to Saudi equities are lower energy prices. However, we currently see strong global growth underpinning demand while Saudi-led OPEC production ahead of the Aramco IPO may help keep supply in check.

What flows are indicating

Global ETPs focused on Saudi Arabia have seen their assets under management (AUM) increase by nearly 15 times this year after gathering over $225 million year-to-date.5 We believe a supportive macro backdrop, ongoing reform efforts, and substantial interest in the Saudi Aramco IPO – which will be only locally listed in Saudi Arabia – are likely to continue underpinning strong and persistent flows. Saudi Arabia’s potential position in the MSCI EM Index may lead to further fund flows. If one applies the expected 2.6% weight to the roughly $1.7 trillion in global AUM - $385 billion in index funds' AUM, $1.3 trillion in active funds' AUM - tracking the MSCI EM Index implies a potential $10.0 billion in index fund flows and $33.8 billion in active fund flows ahead.6


Saudi Arabia’s strong reform agenda, Vision 2030, is rapidly reshaping the Saudi economy and financial markets. Saudi Arabia's MSCI EM Index inclusion, and likely continued growth, means investors' portfolios are also rapidly being reshaped. Given the sole, local listing for Saudi Aramco, this may lead to further inflows into Saudi markets. A supportive macro drop, strong energy prices, and sizeable inflows ahead may continue to underpin the outlook for Saudi equities.