A New Frontier for Equity Investors

The Middle East Transformation

21 May 2024

5 min read

Stuart Rae| Chief Investment Officer—Emerging Markets Value Equities

Investors in emerging-market equities haven’t typically paid much attention to the Middle East. It’s time to take a closer look.

Many global equity investors have historically held limited positions in Middle Eastern countries, which barely registered in emerging market (EM) benchmarks. But new investment opportunities are drawing attention as transformation of the region accelerates.

Since the global pandemic ended, rising oil prices have flooded the Middle East with cash. From a low of less than $20 per barrel in 2020 to a peak of over $120 per barrel in 2022, oil revenues have boomed. But this has also raised questions about how long the region’s dependence on fossil fuel income can continue.

In fact, the Middle East is already actively moving away from its reliance on hydrocarbons. Led by Saudi Arabia and the United Arab Emirates (UAE), this transformation has included strategic initiatives and investor-friendly reforms that offer potentially meaningful opportunities for equity investors.

Saudi Arabia Is Diversifying Its Economy

Saudi Arabia’s non-oil revenue, represented by taxes as a percentage of total government revenue, grew from 12.2% in 2014 to 37% in 2023 (Display). This was compounded by increases in non-oil exports and non-oil contributions to gross domestic product.

Saudi Arabia Is Reducing Dependence on Oil Revenue

SAR Billions

Bars showing Saudi Arabia’s non-oil revenues increasing steadily since 2010

Past performance and historical analysis do not guarantee future results.
As of December 31, 2023
Source: Saudi Arabian Ministry of Finance

Over the last decade, Saudi Arabia has also become an investment behemoth, with $1.2 trillion earmarked by the government for future developments—a clear sign that the country’s leaders have plans to reshape the economy for a post-oil era.

Saudi Arabia had the fastest economic expansion of any G20 economy in 2022, with year-over-year growth reaching 8.7%. This includes a 4.8% year-over-year increase in non-oil growth, driven by wholesale and retail trade, tourism, technology and construction (Display).

Saudi Arabia: Non-Oil Industries Drive Rapid Growth

2021–2024

Table showing real Saudi GDP growth and non-oil real GDP growth declining from 2021 levels to estimated 2024 levels.

Past performance and historical analysis do not guarantee future results.
As of December 31, 2023
Source: Country authorities and IMF staff estimates and projections

Under the umbrella of Saudi Vision 2030—a comprehensive plan to diversify the economy and promote private-sector growth—the country is reshaping itself with initiatives such as the Line and the Red Sea Project. The Line is a planned linear megalopolis that, in its original conception, would stretch across 450 kilometers of the northwest Saudi coastline. The Red Sea Project is a 50-resort portfolio investment in technology-led tourism.

Opening the entertainment and cultural sectors has already fueled more travel spending and tourism. In 2022, 77.8 million domestic tourists visited Saudi Arabia—an increase from 46.4 million tourists in 2015.

Significant investments in infrastructure and tourism projects are being delivered with an eye toward energy transition. These mega projects aim to source 100% renewable energy generated from solar power—underpinned by the largest battery storage facility in the world.

Building a Tourism and Investment Ecosystem

The Saudi government isn’t just throwing dollars at these projects but strategically building an ecosystem that attracts both tourists and investors.

For example, Saudi Arabia has taken steps to streamline bureaucratic processes and reduce red tape, simplifying business registration procedures, improving access to permits and licenses, and enhancing overall transparency. In addition, new foreign-investment laws allow for complete foreign ownership of private companies (49% for publicly listed companies) and incentivize investors with tax breaks and residency permits. These reforms aim to create a more conducive environment for foreign investment, diversifying Saudi Arabia’s economy and supporting sustainable long-term growth.

Equity investors are starting to catch on, even though many are still underweight Saudi Arabia, which only joined the MSCI Emerging Markets Index (MSCI EM) in 2019. As the allure of China weakens and Russia remains sanctioned out of the Index, Saudi Arabia is emerging as a potential winner. The MSCI Saudi Arabia advanced by 10.7% in 2023, while the MSCI China fell 11.2%, both in US-dollar terms. Meanwhile, Saudi Arabia’s weighting in the MSCI EM has risen from 1.4% in May 2019 to over 4% today. Underscoring its growth is the increase of the Middle East to more than 7% of the MSCI EM.

Similar Efforts Are Afoot in the UAE

Like Saudi Arabia, the UAE has undertaken efforts to diversify its economy. Situated at the crossroads of Europe, Asia and Africa, the UAE serves as a hub for trade and commerce. Its strategic location facilitates access to global markets, making it an attractive destination for multinational companies looking to establish a presence in the region.

The UAE has invested heavily in infrastructure and technology. Projects such as Expo 2020 Dubai, Abu Dhabi’s Yas Island development and Dubai South’s Aviation District showcase the country’s commitment to enhancing its infrastructure to support economic growth and attract foreign investment.

Other initiatives demonstrate the UAE’s commitment to fostering innovation and attracting tech-driven investment. These include Dubai’s Smart City project, Abu Dhabi’s Hub71 start-up ecosystem and the establishment of research institutes and technology parks.

To attract foreign investment, the UAE is introducing visa reforms and residency programs. The “golden visa” initiative provides 10-year residency permits aimed at encouraging sought-after workers to establish deeper ties to the region.

Tourism and immigration are also growing. Two telling indicators of this shift have been private-school enrollment growth in Dubai (Display), a proxy for growth of the expat community, and increased tourism volume. Tourist visits to Dubai grew at a compound annual growth rate of 5% between 2014 and 2019 and were expected to be 3% above pandemic-era levels by the end of 2023.

Dubai Private-School Enrollments Reflect UAE Efforts to Open Economy

Number of Pupils (Thousands)

Bars showing Dubai private-school enrollments rising from 212,000 in 2012 to 365,000 in 2023.

Past performance and historical analysis do not guarantee future results.
As of December 31, 2023
Source: Emirates NBD

ESG Focus on Human Rights

Of course, all investments carry risk, and the Middle East is no exception. The Middle East carries a fair amount of geopolitical tensions and lags behind many regions on environmental, social and governance (ESG) issues—particularly human rights. We believe ESG considerations should be top of mind when investing in the region, as these could have a material impact on a company’s business and return potential.

Fortunately, progress is being made on the ESG front. Unemployment among Saudi women has fallen from 33.7% in 2016 to 15.7% in 2023, while women’s labor force participation has jumped from 17.7% to 35.3%—surpassing the Vision 2030 target of 30%. The Saudi government has also introduced legal reforms related to guardianship and inheritance.

The Middle East remains under-researched by many investment managers, and most equity investors are still underweight the region. In our view, this is a missed opportunity. We see strong investment potential in the Middle East as it undergoes a wide-ranging economic and cultural transformation.

While overall market valuations can be demanding, opportunities can be found in companies that trade at relatively attractive prices, in our view. Ultimately, we believe active management can help uncover quality businesses with attractive outlooks across an increasingly diversified region.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Author

Stuart Rae

Stuart Rae is Chief Investment Officer of Emerging Markets Value Equities since 2023 and Chief Investment Officer of Asia-Pacific Value Equities, a position he has held since 2006. He is also a long-standing Portfolio Manager for China Equities. Previously, Rae was CIO of Australian Value Equities from 2003 to 2006. He joined the firm in 1999 as a research analyst covering the consumer sector, initially working in New York and London before moving to Sydney in 2003, Hong Kong in 2006 and Melbourne in 2021. Before that, Rae was a management consultant with McKinsey for six years in Australia and the UK. He holds a BSc (Hons) in physics from Monash University, Australia, and a DPhil in physics from the University of Oxford, where he studied as a Rhodes Scholar. Location: Melbourne