Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why Saudi Arabia Is the Emerging Market Safe Haven in 2026
Transcript
- Lucas: Let's talk about the one emerging market that is actually up this week while everyone else is getting hammered. Luna: I'm guessing Saudi Arabia? Because I've seen the numbers — while South Korea's EWY is down nearly 20 percent in five days, Saudi's index is basically flat. Lucas: Exactly. The iShares MSCI Saudi Arabia ETF, ticker KSA, is down less than one percent over the past week. Compare that to the broad EEM ETF, which lost almost eight percent. Saudi is effectively the safe haven of emerging markets right now. Luna: And this is despite the fact that the Iran war and the Hormuz closure should, in theory, be terrible for the entire Gulf region. Lucas: Right. But here's the key: Saudi Arabia is not dependent on the Strait of Hormuz for its own exports. It has a pipeline to the Red Sea, the Petroline, that can move about five million barrels per day. So even if Hormuz is blocked, Saudi can still ship oil. Luna: Plus OPEC+ just approved a fourth output quota hike since the closure started. That's a direct benefit for Saudi — they have the spare capacity to ramp up. Lucas: Exactly. The Saudis are essentially selling more oil at slightly lower prices, but their fiscal breakeven has come down dramatically. The IMF estimates Saudi needs oil at around $80 per barrel to balance its budget. Brent is currently in the mid-80s, so they're comfortably in surplus. Luna: That's a huge shift from a few years ago when they needed over $100. The 'Vision 2030' reforms — cutting subsidies, introducing VAT, opening up tourism — are actually working. Lucas: And the Public Investment Fund, the sovereign wealth fund, is deploying capital globally. It's taken stakes in everything from Uber to Live Nation. That diversification is starting to insulate the economy from pure oil price swings. Luna: But there's also the currency peg. The Saudi riyal is fixed to the dollar at 3.75. For investors fleeing EM currency volatility, that's a huge plus. Lucas: Particularly when you look at what's happening elsewhere. The Turkish lira is down again, the Brazilian real is under pressure. Saudi offers dollar-like stability with emerging market growth potential. Luna: So is this a structural shift or just a temporary safe-haven bid because of the war? Lucas: I think it's a bit of both. The war is obviously driving capital toward perceived safety. But the reforms are real. Non-oil GDP grew about 4.5 percent last year. The stock market, the Tadawul, has been opening up to foreign investors. Luna: And yet, Saudi is still an oil-dependent autocracy. Geopolitical risk is baked in. Lucas: Absolutely. If the war escalates and hits Saudi soil directly, all bets are off. But for now, they've positioned themselves as the stable hand in a volatile region. And that's drawing in money that might otherwise go to South Korea or Taiwan. Luna: Speaking of South Korea — EWY down 19 percent in a week. That's brutal. What's driving that? Lucas: Korea is the flip side. It's a manufacturing export powerhouse with no natural resources. So higher oil prices are a direct tax on its economy. Plus it's heavily exposed to China demand, which is slowing. And the won has weakened sharply. Luna: So investors are rotating out of Korea and into Saudi. It's a real divergence within EM. Lucas: Exactly. And this is a theme we'll see more of: EM is not a monolith. Countries that produce commodities, especially oil, are benefiting from the supply shock. Countries that consume are getting squeezed. Luna: What about Brazil? EWZ down almost 5 percent this week. They're a commodity producer too. Lucas: Brazil is a different story. It's a major oil producer, yes, but also a big importer of refined products. And it has political instability, a weakening currency, and fiscal concerns. Saudi has none of that right now. Luna: So Saudi looks like a clean trade: oil up, currency stable, reform story intact. Lucas: But it's not without risk. Valuation is a concern. The Saudi market trades at a price to earnings ratio around 20, which isn't cheap for an EM. And liquidity is still lower than in other large emerging markets. Luna: Still, for investors looking for yield and safety in this environment, it's one of the few games in town. Lucas: And that's exactly why we're doing this podcast — to help people understand these shifts. You know, it's funny, we get a lot of messages from listeners saying these episodes help them make sense of the noise. Luna: Yeah, and the reason we can keep doing this without ads is because some of those listeners chip in monthly through buy me a coffee dot com slash fexingo. It's a small group, but it's what keeps us independent. Lucas: Exactly. We don't have sponsors pushing a narrative. Just two people trying to figure out what's actually happening. So if you find value in that, we'd love it if you joined the supporters. Luna: And we're not asking for much. It's literally a coffee's worth. But it adds up and lets us keep doing deep dives like this one. Lucas: Alright, back to Saudi. One more thing I want to highlight: the PIF's recent investments in domestic sectors like tourism and entertainment are actually paying off. The Red Sea project is opening new resorts, and tourist arrivals are up. Luna: So it's not just about oil anymore. That's the bull case. Lucas: Right. And the bear case is that the whole reform story depends on political stability and the royal family's continued direction. If anything disrupts that — succession issues, internal dissent, war spillover — the premium could evaporate quickly. Luna: So it's a bet on continuity. And in the current environment, that might actually be a reasonable bet. Lucas: I think so. For now, Saudi is the outlier in EM — up when others are down. And that's worth paying attention to.