Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why Saudi Arabia Is Building a Stock Market for the World
Transcript
- Lucas: So the Tadawul, Saudi Arabia's stock exchange, is having a moment. The main index is up about 18 percent over the past twelve months, and foreign investors are piling in. But here's the thing — it's not just about oil anymore. Luna: When you say foreign investors, how much are we talking? Because I remember when they first opened up direct access in 2015, everyone thought it would be a flood. Lucas: Right, it was a trickle. But now, foreign ownership of the free float has crossed 15 percent. And the big driver isn't just the oil giant Aramco — it's the wave of secondary listings and IPOs coming from newly privatised state firms. Luna: Secondary listings, that's interesting. So you mean companies that are already listed somewhere else, like Dubai or Abu Dhabi, deciding to also trade in Riyadh? Lucas: Exactly. The most notable one this year was the regional logistics firm that dual-listed — and its volumes in Riyadh quickly outpaced its home market. The Tadawul is deliberately positioning itself as the region's primary capital hub, and the numbers are starting to back that up. Luna: So what's the pull? Is it just the sheer size of the Saudi economy, or are they actually making it easier for foreigners to buy and sell? Lucas: Both. On the mechanics side, they've settled trades in a new depository, they've extended trading hours, and they've allowed something called 'special purpose acquisition companies' — which is a big deal for international sponsors. But the real carrot is the scale. Saudi Arabia is the largest economy in the Middle East, and their market cap is over 3 trillion dollars — that dwarfs its neighbours. Luna: And you said it's not just oil. So what's actually driving the earnings growth in the non-oil sectors? Lucas: Tourism is one. They're targeting a hundred million visitors a year, and the Red Sea coast developments are pulling in real money. Also healthcare and tech — there's a push to localise everything from vaccines to cloud services. Those sectors are showing 20 percent plus profit growth. Luna: But with oil still being the lifeblood of the budget, doesn't that make the whole market hostage to the crude price? We saw that in 2020. Lucas: It's a risk, for sure. The fiscal breakeven is around 90 dollars a barrel, and Brent is hovering in the mid‑80s. So they're running a small deficit. But that's also why they're pushing IPOs — they need to diversify revenue, and listing state assets is a way to raise cash without selling oil. Luna: And the timing — with the US dollar strong and emerging markets generally shaky — why would an EM investor look at Saudi now? Lucas: Because it's decoupled, partly. The Tadawul's correlation to the MSCI Emerging Markets index has dropped to below 0.4 over the past year. Saudi is its own beast, and that can be attractive when you want a hedge. Luna: But we've also seen headlines about regional tension — the Strait of Hormuz thing, the Iran situation. Does that spook the market? Lucas: It does, and the Tadawul does dip on those headlines. But the interesting part is that the dip tends to be shallow and short‑lived now. Investors are starting to treat Saudi as a defensive play within the Middle East, not just a spec on geopolitics. Luna: Hmm. So when you look at the ETF flows, are we seeing actual money moving in, or is it just the index rebalancing? Lucas: There's organic inflow. The big EM funds have raised their Saudi allocation, but they're still underweight compared to the country's index weight. That suggests there's room to grow. And the recent inclusion in some bond indices has also forced passive money in. Luna: And what about the retail investor? The Saudi government was keen on encouraging domestic retail participation — how's that going? Lucas: Retail is actually cooling off a bit. The frenzy from a few years ago has faded, and now it's the institutions that are driving volume. That's healthier, arguably, but it also means the market is becoming more like a developed market — more efficient, but also more demanding. Luna: So is this the moment to start paying attention to the Tadawul specifically, or is it still a niche for the adventurous? Lucas: It's becoming mainstream. When you look at the iShares MSCI Saudi Arabia ETF, it's up about 30 percent over the past year, and the expense ratio is competitive. But you have to look past the slick Vision 2030 messaging and actually examine the regulatory framework — it's better than it was, but it's not perfect. Luna: What's the biggest gap between the pitch and the reality? Lucas: Corporate governance. Some of the state‑linked firms still have related‑party transactions that would raise eyebrows in New York. The market regulator has been more active, but enforcement is inconsistent. And there's still a lot of influence from the sovereign wealth fund, which owns stakes in many of the listed names. Luna: Right. So it's not a pure free market, but it's getting there. Do you think the Tadawul can actually rival Dubai and Abu Dhabi as the go‑to for regional listings? Lucas: It's already pulling ahead. The number of new listings on the Tadawul this year is double that of its neighbours. And the government is making it easier for private family firms to list — they've cut the time from approval to listing by half. Luna: That's a real competitive edge. But isn't there a risk of over‑reliance on state‑backed companies? I mean, how many of those IPOs are actually private firms? Lucas: About 70 percent of the recent IPOs are still state‑linked. That's a lot. But the private sector pipeline is growing, especially in healthcare and consumer. And they're also courting international tech companies to dual‑list, offering tax incentives. That could be a game changer. Luna: So if someone wanted to add Saudi to their emerging markets portfolio, what's the cleanest way? Is there a specific ETF or index they should look at? Lucas: There are a couple of focused ETFs, and most global EM funds have some exposure already. But the key is to check whether the fund is using the MSCI Saudi index or the FTSE — they have different sector weights. The MSCI one has more healthcare and tech, while FTSE leans heavier on banks. Luna: And banks — they've been the traditional Bellwether for the Saudi market, right? Lucas: Yes, the banking sector is about 30 percent of the index. They've been benefiting from higher interest rates and a boom in mortgage lending. But that also means they're sensitive to any change in the US rate cycle, since the riyal is pegged to the dollar. Luna: Interesting. So while the market is decoupling in terms of correlation, the banks are still tied to the Fed. That's a nuance a lot of investors might miss. Lucas: Exactly. So you're getting some diversification, but not complete insulation. And that's something to keep in mind if you're thinking about adding Saudi to your EM sleeve. Luna: On that note, I've been curious — with all these emerging market ETFs, how do we know they're really capturing the local story and not just the big caps? Lucas: That's a good question. The index is dominated by a few large names — Aramco alone is about 12 percent. So when you buy an EM fund, you're making a bet on Saudi's largest firms. The smaller‑cap growth story is less accessible unless you go direct. Luna: So for the retail investor who wants that growth, what do they do? Lucas: They have to look at the funds' holdings, or consider a Saudi‑specific ETF that includes mid caps. It's more work, but it pays off. And honestly, that's what we're here for — to help you see past the index level. Luna: Yeah, and speaking of which — a quick honest thing. We keep this show ad‑free because a small group of listeners chips in monthly through buy me a coffee dot com slash fexingo. That's what funds the research and the production. If you've found this conversation useful, it's an easy way to keep it going. Lucas: And it genuinely matters — every supporter keeps us independent and allows us to dig into stories like this one. No pressure, but it's appreciated. Luna: So back to Saudi — given the geopolitical backdrop, is there a risk that the market gets swept up in a broader emerging market selloff like we saw in May? Lucas: There's always that risk. But the Tadawul's low correlation is a double‑edged sword. When EM sells off, Saudi might not drop as much, but when there's a risk‑on rally, it might not participate as much either. So it's a stabiliser, not a rocket ship. Luna: Makes sense. So what would be your one takeaway for someone who's considering dipping into Saudi stocks for the first time? Lucas: Do your homework on the specific sectors. Don't just buy the index. Look at the healthcare and consumer stories — those are the ones with the most growth potential and the least oil exposure. And keep an eye on the regulatory developments, because that's where the real transformation is happening. Luna: That's a solid place to leave it. Thanks for breaking it down, Lucas. Lucas: Anytime, Luna. The Tadawul is a market worth watching for the next few years — and we'll keep tracking it.