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Saudi Arabia opened its $590 billion stock market to foreign investors Monday \u2013 a move aimed at helping the country\u2019s companies endure a potentially extended period of lower oil prices. <\/p>\n
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\u2019s economy. <\/p>\n
By opening the exchange to all foreign investors, the Saudis hope to help its domestic companies raise significant capital, thereby helping to strengthen \u2013 and diversify \u2013 the country\u2019s 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<\/a> on Sunday, the country\u2019s 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\u2019s 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.<\/p>\n An article<\/a> 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:<\/p>\n \u201cAs the largest and most liquid market in Middle East and North Africa, there is understandably significant interest in and excitement about this event.\u201d<\/p>\n 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\u2019s FoxBusiness show on Monday<\/a>, said any American investor or firm who invests in Saudi Arabia \u201cdoes so with the complicity, knowing full well, that some of that money\u2026 is going to make its way to groups, elements, organizations, or people who are dramatically and violently opposed to the United States.\u201d <\/p>\n 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.<\/p>\n An article on Yahoo!<\/a> 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 \u2013 coupled with full valuations \u2013 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 \u201cas soon as 2017.\u201d<\/p>\n So where do you stand? Are you okay investing in Saudi Arabia\u2019s stock market? Do you expect you\u2019ll do so at some point?<\/p>\n Iran\u2019s 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): \u201cInvestors are lining up to get into Iran.\u201d<\/a><\/p>\n 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)<\/a>, on the occasion of Charlemagne\u2019s announcement of a partnership with one of Iran's largest investment firms, Turquoise Partners.<\/p>\n Bokor-Ingram continued:<\/p>\n \u201cIf the Iranian market went into the global frontier market index immediately it would be worth one quarter of that index right now.\u201d <\/p>\n 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 \u2013 most recently on April 2nd when negotiators announced having reached a highly controversial \u201cframework.\u201d That announcement was immediately followed by celebrations and \u201cdeath to America\u201d chants in the streets of Tehran, accusations from Iran\u2019s leader of political spin taking place in Washington, D.C., and stern warnings from Israeli Prime Minister Benjamin Netanyahu, who insisted<\/a> the framework\u2019s parameters \u201cwould legitimize Iran\u2019s nuclear program, bolster Iran\u2019s economy, and increase Iran\u2019s aggression and terror throughout the Middle East and beyond.\u201d<\/p>\n Even if sanctions are lifted (which some experts predict will happen by year-end), Iran\u2019s stock market is presumably several steps away from following Saudi Arabia\u2019s lead in opening to foreign investors. An April 7th CNN Money article<\/a> quoted Karim Sadjadpour, an Iran expert at the Carnegie Endowment for International Peace, who said this: <\/p>\n \"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.\" <\/p>\n An aspiring Iranian investment manager quoted in the same article agrees, noting that Iran\u2019s banking system simply isn't up to international standards yet. The manager\u2019s investment fund includes (of course) oil, but is \u201cfocusing more\u201d on Iran\u2019s hospitality, retail and service sectors.<\/p>\n So Iran, which boasts the world\u2019s largest oil and gas reserves, is apparently (like Saudi Arabia) interested in diversifying its economy to include additional sectors \u2013 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 \u201cfully functioning stock market.\u201d Interested parties reportedly include investors \u2013 particularly Iranians \u2013 living in the U.S., United Arab Emirates, Kuwait, and even Saudi Arabia.<\/p>\n Bokor-Ingram is (naturally) enthusiastic about Iran\u2019s 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.\" <\/p>\n 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<\/a>: <\/p>\n \"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.\" <\/p>\n So I ask you again: Would you invest in Iran?<\/p>\n 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\u2019s top stories. <\/p>\n Regardless of the outcome of this month\u2019s Iranian nuclear talks, Iran\u2019s pursuit a nuclear weapon post-talks (deal or no) could well spark a nuclear arms race<\/a> in the Middle East (including Saudi Arabia, Israel, Egypt, Turkey). <\/p>\n Would you invest in Saudi Arabia, a traditional \u2013 yet sometimes questioned \u2013 U.S. ally whose stock market is fully valued?<\/p>\n 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?<\/p>\n 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 \u201cpassive\u201d investor?<\/p>\n My goal for this article was to make you think\u2026 and to lay out some of the issues you might think about. Comments welcome.<\/p>\nWould you invest in Saudi Arabia?<\/h2>\n
How about Iran?<\/h2>\n
Saudi Arabia and Iran<\/h2>\n