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In September of 2022, the ÃÛ¶¹ÊÓƵ AM Emerging Markets Equities team travelled to Saudi Arabia (Riyadh and Dammam) and Qatar. We visited more than a dozen companies, as well as the Saudi Ministry of Economy and Planning and the Saudi Central Bank. Here are some of our observations and insights in a summary.

From an investing perspective, Saudi Arabia is in a sweet spot at the moment, benefiting from high energy prices and a strong desire from the government to deliver on its 2030 Vision.

Energy is the key to Saudi Arabia’s economic edge, and the country is making better use of its access to oil than in the past.

Since Saudi society has only recently begun to open up, we believe there is considerable catchup potential for the consumption and services areas of the economy. The government is aware that it needs to improve quality of life, e.g. offer more entertainment options, in order to keep especially the globally minded young people happy—65% of the population is under 35 years old—and to attract international talent.

However, questions about execution remain and more evidence needs to be seen.

To put it simply, the Saudi equity market is not cheap. With liquidity mostly trapped domestically, there is a high level of retail trading. The market is dominated by commodities and banks, most of which at the time of our visit didn’t exhibit convincing alpha potential.

With respect to oil itself, after significant underinvestment in the past several years, we believe that there is potential for growth in supply. This could come from US shale as well as the Gulf Cooperation Council (GCC) countries. That said, there are many factors that could cause higher volatility, including COVID, the war in Ukraine, Iran, Libya/Iraq issues, the release of the US Strategic Petroleum Reserve, and inflation and supply chain issues.

Another strategic focus is the petrochemicals and fertilizer sector. It is currently experiencing positive tailwinds given high oil and gas prices and a relatively fixed cost structure. On the negative side, it is clear that subsidies on feedstock prices will continue to be reduced in the future, and potentially moved to a market-linked pricing system, while still aiming to maintain global cost leadership.

Hence, it is important to stay close to this market and monitor potential opportunities on a continuous basis.

Qatar on the other hand is already among the richest countries in the world on a per capita basis with a population of about three million made up largely of migrant workers.

Qatar is investing heavily in liquefied natural gas (LNG) production, expecting to grow its capacity by more than 60% by 2026/2027 . We believe the demand for this additional LNG production will be there, as Europe learns it cannot depend on one provider for its energy use. The economy overall is expected to grow by an additional 30% in real terms by 2025. However, liquidity in the Qatar equity market is so far limited despite the growth potential. (Data source: FactSet)

The sweeping pro-business reforms and rising oil prices are supportive for economic growth in Saudi Arabia and Qatar. Maintaining that momentum and commitment to diversify the economy will be pivotal for the long-term investment case. So far, we are encouraged by what we have seen on the ground.