Saudi Arabia is the world’s second largest oil producer.
It has a per capita income on a par with the EU average, yet it is not usually considered a developed market nor even an emerging market.
The word ‘market’ is key, because its stock market is not open directly to foreigners. Instead, investors must buy stocks indirectly via banks.
In many other respects, however, it is a country worthy of investigation. The country has a young and rapidly growing population, the number having almost doubled since 1990 to 30 million. The median age is only 25 years.
As with the fellow members of the six-nation Gulf Co-operation Council (GCC), government spending is the primary driver of its economy.
It has grown fourfold in the decade to 2012 to around US$600 billion. Despite this, the country continues to run a fiscal surplus and the Kingdom typically uses a conservative oil price assumption (currently, around $70/barrel) for its budget.
Foreign reserves are not disclosed but are thought of as being somewhere between $500 billion and $1 trillion. The latter figure would be the third highest in the world, after China and Japan.
The trade surplus is in excess of $200 billion while inflation has hovered around the 5% level.
Since the start of the Arab spring in December 2010, the Saudi government has significantly increased the allocation to social spending.
Education, healthcare and low income housing were allocated 25% of total expenditure in 2014 budget. In addition, the government has initiated unemployment benefits and salaries have been raised.
A further step, in a country where almost a third of the population are non-nationals (mainly from Asia or the West), has been the encouragement of private sector firms to hire Saudis, while women are also being encouraged to work.
This has all resulted in higher consumer spending, and this in turn provides attractive investment opportunities.
One such example is Al Hokair, a fashion retailer, which distributes a number of well known high-end brands in Saudi Arabia and elsewhere in the GCC. Earnings are expected to grow by 15-20% over the next three years, yet the shares trade at a forward PE ratio of below 20x, which is a discount to similar retailers in emerging markets.
Another investment in the consumer theme is Saudi Airlines Catering, which supplies airlines flying from the country.
The flag carrier, Saudia, is its main customer and controlling shareholder. Profit margins are high and the return on equity is over 40%.
As capital spending is low, free cash flow generation is strong and dividends are high. Growth in traveller numbers to the holy cities of Mecca and Medina are driving earnings growth of around 15% for the next three years.
We do not like the construction sector, partly because of rising labour costs, while the petrochemical industry also provides good opportunities, given low input costs and expanding capacity.
According to Lipper, the fund returned 10.4% in the three years to 4 March versus a -11.2% loss in the benchmark.