UBS sees foreign investment rising in Saudi Arabia, wider Mideast

International investors’ interest in Saudi Arabia and the wider Middle East region is growing and foreign capital inflows to the Kingdom is expected to increase “significantly” following the decisions by major index compilers to upgrade the country to emerging market status, UBS Global Wealth said in a recent report.

"Our clients are expressing increasing interest in Middle Eastern assets as economic reforms and other factors open up local markets to international investors,” Michael Bolliger, head of emerging market asset allocation, UBS Global Wealth, said in a statement.

“Our coverage of key instruments such as equities, bonds, and sukuk has steadily expanded to reflect demand, and will likely continue to do so in the years ahead,” he added.

Earlier this year, FTSE and MSCI added Saudi Arabia to their emerging market benchmark.

Last week, S&P Dow Jones Indices said it will upgrade Saudi Arabia to emerging market status from a stand-alone market next year.

The decisions are expected to boost foreign capital inflows to Saudi Arabia.

Additionally, the effect could be enhanced by future inclusions in emerging market sovereign bond indices, which could benefit sovereign bonds from Saudi Arabia, the UAE, Qatar, Bahrain, and Kuwait, the financial advisor said.

In the report, UBS chief investment officer Mark Haefele also pointed out that the ambitious reforms undertaken by Saudi Arabia and other Middle Eastern countries also face risks, such as renewed oil price weakness, which could affect fiscal flexibility to implement socially-sensitive programs and weaken the external position of the region.

Other risk factors include potential delays in reform programs or a lack of privatization and private sector participation, which could trigger uncertainty for foreign investors.

However, the region's overall economic outlook is supported by sound fundamentals, the report added.

The CIO has expanded its coverage of the region to provide regular updates on the credit profiles of all sovereigns as well as several banks and corporations in the GCC.

CIO's coverage of sukuk instruments has also widened, and the Saudi Stock Market (Tadawul) will be covered regularly in its equity-related publications, the report said.