ETF Spotlight

The hard market truth about Khashoggi killing: Why you may soon be investing in Saudi Arabia

Key Points
  • Saudi Arabia's plans for an economy moving beyond its oil wealth are in doubt after the kingdom's less-than-credible, shifting narrative about the death of journalist Jamal Khashoggi.
  • Crown Prince Mohammed bin Salman's most ambitious projects, including the planned smart city known as Neom, are now considered to be at risk as more overseas investors face public pressure and concerns about Saudi progress.
  • But one source of foreign money is almost sure to keep flowing into Saudi Arabia: investment fund money, including the savings of individual investors in mutual funds and retirement plans.

A photograph of the son of slain Saudi journalist Jamal Khashoggi shaking hands with Saudi Arabia's Crown Prince Mohammed bin Salman was released late last month. The image was difficult for many in the international community to process given the Saudis' shifting narrative on the killing and the fact the son, Salah Khashoggi, had been banned by the Saudis from leaving the country for months due to his father's criticisms of the regime — he was finally allowed to travel to the U.S. in late October after the handshake photo opp.

Saudi Crown Prince Mohammed bin Salman, right, shakes hands with Salah Khashoggi, a son, of Jamal Khashoggi, in Riyadh, Saudi Arabia, on Tuesday, Oct. 23. 
Saudi Press Agency | AP

The Khashoggi killing came after a period of time when Crown Prince MBS had consolidated power over Saudi Arabia and had been on a global charm offensive. Earlier in 2018, it was other images of greetings being published, as MBS met with Silicon Valley titans like Google's founders and the Queen Elizabeth II. While the Crown Prince has not been implicated, and this week called the killing a "heinous crime", his international credibility has taken a hit. So have his plans to transition the Saudi economy from an oil-dependent kingdom to a diversified economy in the decades ahead with the help of an increased flow of foreign investment.

The story won't go away. U.S. Defense Secretary James Mattis said the murder threatened stability in the Middle East, though he stopped short of blaming the Saudi leadership or implicating Crown Prince MBS. At the same conference in Bahrain where Mattis spoke in late October, Saudi Foreign Minister Adel al-Jubeir called the reaction to Khashoggi's death "hysterical."

Since that time, Turkey has released an audio recording of the murder, the Central Intelligence Agency has concluded the killing was likely ordered by the crown prince, and the Saudis continue to deny MBS was involved after firing top officials known to be close to him and making many arrests. Saudi prosecutors are seeking the death penalty for five people alleged to be involved in the killing, as well as lesser charges for six others.

On Tuesday, President Trump said in new statements that he stands with Saudi Arabia. "We may never know all of the facts," but, "our relationship is with the Kingdom of Saudi Arabia," Trump said. "It could very well be that the Crown Prince had knowledge of this tragic event, maybe he did and maybe he didn't!"

There is someone else who soon may be standing by Saudi Arabia, and with their own dollars, too: You.

Why you may soon be investing more in Saudi Arabia

As the Khashoggi killing headlines continue, there is a hard stock market truth about this story's persistence. While the Saudis played up the more than $50 billion committed to its economy, primarily from U.S. institutions, at the conference in Riyadh that many global business leaders and politicians pulled out of after the Khashoggi killing, regional experts are questioning whether the foreign investment sought by Saudi Arabia from global institutions ultimately will flow into the kingdom.

"My gut is that this was a watershed moment," said Jean-François Seznec, a member of the Middle East Institute and adjunct professor at the McDonough School of Business at Georgetown and Johns Hopkins' School of Advanced International Studies, who spent years as an investment banker in the Middle East. "I think until now there was great deal of hope that the reforms would really result in change. Now foreign investors are realizing all of a sudden that the millions of dollars in ventures is at mercy of one guy. This will translate into investors being very wary of doing anything in kingdom."

But many individual investors who have diversified equity asset allocations that include emerging markets will soon be investing more, not less, in Saudi Arabia, and if they stick with their investment plans, won't be able to do anything about it. A fortuitous market event occurred for Saudi Arabia in 2018: major stock market index creators, FTSE Russell and MSCI, announced they would be adding Saudi Arabia to emerging markets benchmarks that form the basis of trillions of dollars in investment funds around the world, including in the U.S., mutual funds and exchange-traded funds that are used in individual investment plans from 401(k)s to IRAs and retail brokerage accounts.

The base case probably remains that the Saudi market still has gains to come.
Charlie Robertson
Renaissance Capital global chief economist

There already are two ETFs that track the Saudi Arabian stock market, BlackRock's iShares MSCI Saudi Arabia ETF (KSA) and, in a fund launch that was unfortunately timed, the Franklin Resources' Franklin Templeton FTSE Saudi Arabia ETF (FLSA), which launched in October right before the Khashoggi killing news broke. But these funds aren't where the real money is. Even as Saudi Arabia has been one of the only global stock markets to generate high returns in 2018 — and is still up 11 percent as of Tuesday — the iShares ETF has about $200 million in assets and the new Franklin ETF only a little over $2 million. The Wisdomtree Middle East Dividend Fund (GULF), which has a 26 percent weighting to Saudi Arabia, its biggest market, has $17 million in assets. The big money is in the broad emerging market index funds and ETFs that are used for emerging markets exposure in many investment plans created by financial advisors and asset management firms.