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June 23, 2015

Would You Invest In Saudi Arabia Or Iran?

By Adam Feik for INO.com  

Saudi Arabia opened its $590 billion stock market to foreign investors Monday – a move aimed at helping the country’s companies endure a potentially extended period of lower oil prices.

Interestingly, only about one-fifth of the companies traded on the Tadawul Saudi Stock Exchange are directly in the oil business. But most others are, of course, heavily affected by oil, which has long been the major driver of Saudi Arabia’s economy.

By opening the exchange to all foreign investors, the Saudis hope to help its domestic companies raise significant capital, thereby helping to strengthen – and diversify – the country’s economy. The Kingdom may also be hoping some new foreign investment can help plug a hole in its budget, which has expanded to pay Saudi companies that rely on government contracts for construction, infrastructure, agriculture, education, and other areas. According to the Saudi Gazette on Sunday, the country’s breakeven crude oil price has risen from just under $75 in 2009 to about $90 today, translating into an estimated $38.6 billion budget deficit for fiscal year 2015. The article also reports that 90% of Saudi Arabia’s government revenue come from oil and gas. Perhaps if those Saudi companies could receive an influx of capital from the markets, they could better sustain their own growth and rely less upon government funding, the thinking could be.

Would you invest in Saudi Arabia?

An article at OilPrice.com on Tuesday featured this quote from Khatija Haque of the Dubai-based bank Emirates NBD, referring to the opening of the Saudi stock exchange to foreigners:
“As the largest and most liquid market in Middle East and North Africa, there is understandably significant interest in and excitement about this event.”
Okay, so some new opportunities are available. Still, others are apparently less enthusiastic than Ms. Haque. Take former Military Intelligence Officer Lt. Col. Bill Cowan (Retired), who on Neil Cavuto’s FoxBusiness show on Monday, said any American investor or firm who invests in Saudi Arabia “does so with the complicity, knowing full well, that some of that money… is going to make its way to groups, elements, organizations, or people who are dramatically and violently opposed to the United States.”

Cowan cites the fact that Saudi money was a major initial funding source for ISIS, the fact that 15 of the 19 terrorist attackers on September 11, 2001, were Saudis, and the fact that Saudi Arabia continues funding radical imams and organizations. He does so while acknowledging Saudi Arabia may be a fine place to invest, from a purely financial standpoint. I should also point out Saudi Arabia is officially our ally.

An article on Yahoo! Finance on Wednesday suggested that foreign investor interest in Saudi Arabia so far this week has been underwhelming, citing factors like modest trading volumes and liquidity levels – coupled with full valuations – that could have foreigners sitting on their hands for now. The article also cites a source who opines that MSCI could add Saudi Arabia to its emerging markets index “as soon as 2017.”

So where do you stand? Are you okay investing in Saudi Arabia’s stock market? Do you expect you’ll do so at some point?

How about Iran?

Iran’s stock market, of course, is off limits to foreign investors, due in part to international sanctions still in effect against the country. But according to a CCN Money headline (and I quote): “Investors are lining up to get into Iran.”

The Tehran Stock Exchange market cap stands at about $160 billion with 300 public companies, according to Charlemagne Capital emerging markets portfolio manager Dominic Bokor-Ingram, who spoke to CNBC back on April 7th (video here), on the occasion of Charlemagne’s announcement of a partnership with one of Iran's largest investment firms, Turquoise Partners.

Bokor-Ingram continued:
“If the Iranian market went into the global frontier market index immediately it would be worth one quarter of that index right now.”
Of course, the international sanctions against Iran are currently a heated topic in the nuclear talks currently facing a June 30th final deal deadline. The world is watching to see whether the countries involved in the negotiations will strike a deal, and if so, what that deal will be. Already, the deadline has been extended 3 times – most recently on April 2nd when negotiators announced having reached a highly controversial “framework.” That announcement was immediately followed by celebrations and “death to America” chants in the streets of Tehran, accusations from Iran’s leader of political spin taking place in Washington, D.C., and stern warnings from Israeli Prime Minister Benjamin Netanyahu, who insisted the framework’s parameters “would legitimize Iran’s nuclear program, bolster Iran’s economy, and increase Iran’s aggression and terror throughout the Middle East and beyond.”

Even if sanctions are lifted (which some experts predict will happen by year-end), Iran’s stock market is presumably several steps away from following Saudi Arabia’s lead in opening to foreign investors. An April 7th CNN Money article quoted Karim Sadjadpour, an Iran expert at the Carnegie Endowment for International Peace, who said this:

"Removing the sanctions will take time. But what will take much more time is creating an efficient business environment with rule of law and transparent regulations."

An aspiring Iranian investment manager quoted in the same article agrees, noting that Iran’s banking system simply isn't up to international standards yet. The manager’s investment fund includes (of course) oil, but is “focusing more” on Iran’s hospitality, retail and service sectors.

So Iran, which boasts the world’s largest oil and gas reserves, is apparently (like Saudi Arabia) interested in diversifying its economy to include additional sectors – from consumer, industrial, and manufacturing to the more traditional emerging-market sectors of metals, mining, oil, gas, telecoms, and banks. The country is already home to a well-educated workforce, and (according to Bokor-Ingram) a “fully functioning stock market.” Interested parties reportedly include investors – particularly Iranians – living in the U.S., United Arab Emirates, Kuwait, and even Saudi Arabia.

Bokor-Ingram is (naturally) enthusiastic about Iran’s prospects, saying, "The market is trading at price to earnings multiple of five and the dividend yield is in the teens." He adds, "These are terms that emerging market investors can't find anywhere else in the world." Yet morally (and in the name of national security), would you be willing to invest in Iran, even if you could? U.S. General Martin Dempsey, chairman of the Joint Chiefs of Staff, recently said this to reporters in Jerusalem, according to Reuters:

"If the deal is reached and results in sanctions relief ... it's my expectation that it's not all going to flow into their economy. I think that they will invest in their surrogates. I think they will invest in additional military capability."

So I ask you again: Would you invest in Iran?

Saudi Arabia and Iran

Saudi Arabia and Iran, of course, are religious rivals. Iran is a Shiite nation, and Saudi Arabia is Sunni. Even today, Saudis continue fighting Iranian-backed Houthi rebels in Yemen, in one of this year’s top stories.

Regardless of the outcome of this month’s Iranian nuclear talks, Iran’s pursuit a nuclear weapon post-talks (deal or no) could well spark a nuclear arms race in the Middle East (including Saudi Arabia, Israel, Egypt, Turkey).

Would you invest in Saudi Arabia, a traditional – yet sometimes questioned – U.S. ally whose stock market is fully valued?

Would you invest in Iran, a state sponsor of terror, avowed enemy to Israel and the U.S., and aspiring nuclear mischief maker whose stock market offers double-digit yields?

Or will you straddle the fence, and simply wait for these countries to become included in generally accepted global indexes, at which time you can be a “passive” investor?

My goal for this article was to make you think… and to lay out some of the issues you might think about. Comments welcome.

Courtesy Adam Feik for INO.com  

This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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