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High Flying Saudi Arabia ETF Plunges on Sanction Concerns

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Saudi Arabia’s shares fell nearly 7% during trading hours on Oct 14 as investors are worrying about the Riyadh’s deteriorating relationships with the International community after the disappearance of Saudi journalist Jamal Khashoggi. However, shares recovered a bit by the end of the day to end down 3.5%. Per Bloomberg, all but seven of the gauge’s 186 members fell with number of shares exchanged being more than double the 30-day average (see: all the Africa-Middle East Equity ETFs).


Per Reuters, the index suffered its biggest intraday decline since December 2014, when oil prices were crashing, with the Gulf region's biggest petrochemical producer, Saudi Basic Industries, tumbling as much as 7.9%. Riyadh stocks will be reclassified by MSCI as an emerging market next year (see: 5 Defensive ETFs to Survive Global Market Rout).


Saudi journalist Jamal Khashoggi, a prominent critic of Riyadh and a U.S. resident, has been missing after he visited the Saudi consulate in Istanbul on Oct 2. Per Sabah, a Turkish newspaper, Khashoggi had turned on the recording function on his Apple watch before walking into the building and his "interrogation, torture and killing were audio recorded and sent to both his phone and to iCloud." However, Riyadh has denied these allegations but failed to provide for any evidence that the journalist is still alive (see: Winning ETF Strategies for the Fourth Quarter).


The stocks have plunges nearly 9% since Khashoggi Oct 2 visit to the Saudi Consulate and resulted in wiping out all the market gains made in 2018. 


Bill Ford, Chairman of Ford Motors F and J.P. Morgan Chase and Co’s Chief executive Jamie Dillion are the among the latest to cancel their visit to the investment conference in Saudi Arabia as a boycott for Khashoggi’s disappearance with countries like the U.K., Germany and France asking for credible investigation. However, U.S. Treasury Secretary Steve Mnuchin still plans on attending the event “because of the importance of the issue of ending terrorist financing.”


“It’s the political environment. The market is reacting negatively to sentiment around the Khashoggi case and the political noise around it,” said Salah Shamma, head of investment for the region at Franklin Templeton Emerging Markets Equity, a big global fund manager and according to her the economic fundamentals of the country remain unaffected till now.


Saudi exchange reported that foreign investors were the net sellers in the week ended Oct 11. 1.62 billion worth of shares were sold by them in comparison to purchasing shares worth 995.8 million riyals.


President Trump tweeted on Oct 13: “severe punishment” for Saudi Arabia if it turned out that Khashoggi was killed in the consulate. However the Saudi Kingdom said that it will be hit back on the economic sanctions imposed on it because of the khashoggi case and are likely to retaliate with bigger measures than the ones being imposed on them and oil could serve as their tool for the same. 


This decline in Saudi stocks draws focus to iShares MSCI Saudi Arabia ETF KSA which has returned nearly 7.2% year to date despite the woes in the domestic market in the past week.


ETF in Focus




The fund tracks the MSCI Saudi Arabia Investable Market Index (IMI) 25/50 Index. AUM is $226.1 million and expense ratio is 0.74%. It comprises 72 holdings. Financials (42.2%) and Materials (33.6%) sectors hold double-digit weights. It has lost 6.6% over the past week and carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. 


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