ETF Analysis - iShares MSCI Saudi Arabia ETF (KSA)

TLDR

1. Saudi Arabian economy is likely to boom due to rising oil prices

2. The Saudi industry is very biased and the manufacturing base is very weak, so the index configuration is not seen as safe due to concentration risk.

3. Think it as investing in Saudi Arabia rather than looking at the prospect for the companies within.

Introduction

Usually, when people decide to invest, they tend to forget everything they have heard before, asking, "So is it going up or down?" So I start by looking at the net asset chart of the fund, which seems to be something like this. I hear the oil burning. The current price per share was USD 29.87, up 16.5% from the beginning of the year. This fund has a return of about 2% on dividends.

Going forward, this ETF is an index fund created by benchmarking the MSCI Saudi Arabia 25/50 Index. Investing in companies in Saudi Arabia usually invests mainly in government-owned companies, such as banks and electric / telecom companies. In fact, Saudi Arabia does not have much concept of private enterprise. Just think of investing in Saudi country. Saudi Arabia is kind of a big oil store in the region. If the price of oil goes up, it makes a money feast, and when the price of oil drops, it goes around to borrow money everywhere. When the crude oil price went down to $ 20, Saudi Arabia was in horrid status. They tried to borrow money here and there, issueing bonds.

We believe that oil prices have recently rebounded and that Saudi Arabia has been steadily rising. They have cut production for oil , and there are demand and Middle East issues are still here and there, so oil prices do not seem to fall abruptly for the time being. Then the oil money will go to Saudi Arabia a lot. When money comes in, the money get cheaper and the asset value goes up. We can not build an oasis or farm or buy a desert in Saudi Arabia. We are a foreigner and have limited access for investment in Saudi real estate. So Saudi Arabia seems to have lowered investment barriers for foreign investors because oil prices have fallen. The Saudi Arabia QFI (Qualified Forward Investor) licence is legislated by CMA (Capital Market Authotity), and the foreign investor (usually speaking, financial institutions) who qualifies can invest Saudi stocks.

Today (2018-05-04) , the net asset value of this fund is about $ 200 million. It seems that there is not a big problem for the exchange rate because the size comes out to some extent. Concerns are that Saudi Arabia has a lousy manufacturing industry, and the major investment companies are mostly in the service sectors, such as finance / infrastructure. There is nothing like manufacturing. Let's look at the table below.

The major 2 constituent sectors comprise of 70% of the total asset. Concentration risk exists because the industry is not well diversified. However, due to the nature of the country, running a factory is difficult. However If this ETF is Saudi Arabia itself, there is no big deal. And since Saudi Arabia is the oil itself, let's just think of one thing when you invest in our fund. "Oil Value". If you go to the gas station and the price of the gas is so high! Use a human learning technique instead of machine learning and say, "A lot of money will be in Saudi Arabia!" . With 100 GPUs, you can not have a million cores, but your Human Learning Architecture has 100 billion neurons and dozens trillions of synapses running at low power and low cost! Please remember.

The management fee is 0.74% per year, which is neither high nor low. The annualized volatility is around 15 ~ 16%, and the beta to the S&P 500 is 0.02, which means no correlation to the US stock market. The oil value will be highly correlated instead. It is troublesome to calculate somebody please help me out to prove it. As a financial indicator, index PE is about 16.7 and PB is 1.8. Well, that's just it. However, Saudi companies are usually government-run companies, and it's easy to think that the oil prices are going up. For reference, 75% of Saudi's national budget (tax revenue) comes from oil, and 90% of total exports come from oil exports. L'Huile, c'est moi

Saudi Arabia and the currency Saudy Arabia Riyal Saudy Arabia Riyal to think that this is a fund to invest, so let's take a look at Saudi. Saudi Arabia is a Middle Eastern country with a population of 33 million and was built as a kingdom in 1932, before that it was a collection of tribal units. The capital city is Riyadh. Where is Riyadh? , see below.

 Politically, it is absolute monarchy, not a society so open. In terms of gender discrimination, it is rather like the Islamic Levant state, except for indiscriminate rape thing in ISIS. Saudi is a country where a woman gets killed when she is not wearing a hijab in a street. But they don't care much because of good relation with the United States. It is also one of the countries that are not safe in the swirl of the Islamic revolution. However people there can live life unlike Syria, which prevents it from being taken over by people . GDP per capita is USD 55,000 based on PPP, which should be only seen as a number. Almost 99% of the wealth is owned by a small number of billionares such as royal families. It's a common error of normality assumption I think the median is under USD 20,000. In fact, nominal GDP per capita is about USD 20,000. The reason why PPP is much higher than the nominal PPP is that it usually happens when labor costs are relatively lower than product price. The prices of industrial products are constant anyway. It can be said that the fact that the labor cost is very cheap shows most people don't get paid enough. In Korea, too, PPP and nominal GDP are much different, but there is still a difference of 20 ~ 30%. There is little difference between the PPP and the nominal value in the United States where the labor cost is high. The reason why the people of Saudi Arabia do not cause a riot because they have better life than Syria. Saudi people are not like other islamic countries. It has just been out from tribal unit system, and the country is quite closed. Saudi Arabia has a slightly different mood while people in other Islamic countries are very virile in economic action. Instead of oil, Saudi Arabia invests heavily in agriculture, farming in the desert (in fact, the majority of the country is desert), granting subsidies or using groundwater free of charge. What is the use of groundwater free of charge? This country is in a real water shortage situation and the it is serious. The groundwater is usually rain in other countries, but it is not ground water that refills. It is water that was just underground for a long time. 80% of the water has already depleted and probably rained back over the Amazon. After about 100 years, Saudi Arabia will have neither water nor oil. Before that, they have to reform the industry. It is a country that only invests in oil until something revolution comes out.

Risk

1. Liquidity risk

As the size of the fund is around USD 200 millions, there seems to be no problem with liquidity. Daily trading volume is roughly USD 10 millions, so it is neither big nor small. It does not matter if you invest less than 1 millions only in this.

2. Credit Risk

Funds that hold stocks for a long time usually lend securities and earn extra income from the lending fee. In the case of developed countries and some developing countries where legal system is well constituted, such security lending is not dangerous, but underdeveloped countries which doesn't have good justice system have some issues on the business .There are quite a few countries in which has bit ambiguous law enforcement having cases where a security borrower failed to return securities. Vietnam and Indonesia in Southeast Asia have a lot of this cases, surprisingly they have written laws. In Saudi and Middle Eastern countries, the law usually refers to the Sharia law, which is applied according to the interpretation of Shariah scholars. Since Islam prohibits the receipt of interest, the Shariah law does not allow anyone to receive interest. So, there is a technique of borrowing money by overlap a commodity swap, which is Islamic finance. However, if you apply the Sharia law in Saudi Arabia, you may or may not be able to borrow securities depending on whether you want to see the stock as money or not. But I think there is no serious credit risk on this fund.

3. Market Risk

Most of the risks are market risks because they are equity stocks. Stock price fluctuation is market risk. The combined credit risk and political risk premiums are not even 1-2% in the worst case unlike market risk. The market risk seems to be just the risk of oil price. I am sorry that I am writing always to end punctuated with 'oil'. I would rather analyze the oil here! The annual volatility of the fund is about 16%, which is more likely to be the volatility of the general stock index. Isn't it a fairly small volatility compared to oil fiuctuations? But profit goes with oil.

And, there is a currency risk. The Fund is calculated in USD, but the actual assets are those that are denominated in SAR and are therefore directly exposed to the USDSAR exchange rate. It does not seem to be a hedge, and it is not easy to hedge these funds. Managers have to do some quanto adjustment contract to hedge this risk, USDSAR Quantto ... I don't think the hedge is easy after considering FX option market liquidity and transaction costs. Moreover the fund is to invest in Saudi Arabia! SAR is also part of it.

4. Political Risk

This is a commodity that can only be operated with a Qualified Investor (QFI) qualification granted by the Capital Authority of Saudi Arabia (CMA, not a securities account offering interest on daily basis). Saudi Arabia's absolute monrchy system allows this system to be changed anytime. Of course, the size of the BlackRock is huge to get easily banished by the government. If king says, "I hate black stones!" It may be canceled at any time. In that case, the fund must be liquidated. If you have to liquidate even if you have seen the loss, there is no other way but to settle the liquidation cost and out of it. The liquidation cost will be quite high. At least 5% ~ 10% of the net asset value can be directly or indirectly damaged. What to Market "Black Rock Saudi QFI revoked!" and then all the traders and investors in the world will start to sell BlackRock owned Saudi assets at the speed of light. The industry is full of assholes anyway. It is a world of highly educated luxury assholes. But there is not much things this fund can do for it.

Conclusion

As oil prices are rising, funds will flow into the Saudi economy, which will lead to domestic investment. The Saudi stock market is not likely to plummet for the time being, as it will have money in the Saudi domestic stock market and open its stock market to foreign investors. You can not buy Saudi stock directly, so let's just trust Saudi King brother! I think this ETF is an effective approach. But mind that is not stock recommendation. Bear in mind that investment always requires analysis, judgment and decision.

Etc

The following is a stock / index ticker, and it is likely to refer only to the reference person.

CUSIP 46434V423

Bloomberg Index Ticker: M1SA5IM