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Top 3 Investment Opportunities in Saudi Arabia

Press reports surrounding President Barack Obama’s end-of-March visit to Saudi Arabia highlighted the importance of the trip in repairing what’s become a rather fragile relationship between the United States and the Kingdom, its longstanding ally—a relationship that has been strained for a while now over key issues like Iran’s nuclear program and the civil war in Syria.

But at a more micro level, some U.S. investment firms are finding that geopolitics really isn’t an issue. When it comes to investing, Saudi Arabia is increasingly opening up to foreign investors, so although geopolitics and Middle East tensions are typically high on investors’ lists when they think of Saudi Arabia, there are a great number of worthwhile investment opportunities in the Kingdom that in reality, have little or nothing at all to do with the macro situation, according to Bill Mann, CIO and portfolio manager at Motley Fool Asset Management.   “Saudi Arabia is one of the most interesting markets in the world but it’s also one of the most poorly understood markets,” said Mann, who just returned from a trip to the Kingdom. “For stock investors, it’s a very hard market to get into and we have to buy derivatives, but most investors don’t even think to explore because they’re thinking in terms of geopolitics and don’t go any further than that, and when they say they’re nervous about Saudi Arabia, they’re nervous about oil.”

Bucking that trend, however, Mann started investing in Saudi Arabia shortly after the 2011 Arab Spring, “when the geopolitical tensions made some of the most expensive regions in the world extremely cheap.” Today, Saudi Arabia is one of his fund’s largest exposures, he said, and “although things move very slowly there, I’ve noticed that it’s all very deliberate, so when you hear the regulators talking about opening the markets up, you can be sure they will do it but in their time.”

Mann is particularly bullish on a few Saudi sectors that he believes will not be affected by geopolitical tensions:

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1. The consumer sector: “We own a dairy company called Almarai, which is one of the largest vertically integrated dairy companies in the world,” he said. The company is dominant throughout the Middle East and has an edge over its competitors in that it produces fresh milk. “The rest of them are offering imported, frozen milk, which to my mind makes them more susceptible to geopolitics than a company that’s producing fresh milk,” Mann said.

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2. The banking sector: Saudi Arabia has excellent, well run and well capitalized banks. Mann likes Al Rajhi Bank, one of the largest Islamic banks in the Kingdom and in the world, which handles the payroll for a number of government ministries and is “run by extremely professional bankers,” he said. “The Islamic Council that help operate and guide the bank is also very well versed in banking.

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3. The infrastructure sector: This is one of the greatest areas of growth in Saudi Arabia. The Saudis are in the process of creating new cities “out of nothing,” Mann said, and the government has a whopping $200 billion budget for infrastructure development.

Overall, Mann believes that Saudi companies are not just very well run but also extremely shareholder friendly, which, he said, is not often the case in most emerging markets.

At the same time, the country is also going through many of the same social changes that other emerging market nations are going through, albeit at a different pace and in a different manner, given that it operates under strict Sharia law. Saudi Arabia also has an extremely poor record with respect to human rights, particularly in the treatment of women and girls and foreign workers, and this hurts the country’s image globally.

However, “from our standpoint, things are changing rapidly and you have companies and industries that in the course of a single generation, have suddenly come about, like insurance and healthcare,” Mann said. “Twenty years ago, there was no market for these but now they’re growing.”

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