ETF Trends
ETF Trends

The iShares MSCI Saudi Arabia Capped ETF (NYSEArca: KSA) fell Wednesday after Fitch Ratings lowered the kingdom’s credit rating by one level, citing concerns about falling oil prices and the ability of Saudi Arabia to bolster the non-oil sectors of its economy.

“Fitch lowered the kingdom’s long-term foreign and local currency ratings to A+ from AA- with a stable outlook. It noted the “continued deterioration of public and external balance sheets” as a reason for the cut,” reports Nicolas Parasie for MarketWatch.

Although Saudi Arabia is the largest producer in the Organization of Petroleum Exporting Countries (OPEC), KSA does not have a large weight to the energy sector. The only exchange traded fund dedicated to Saudi stocks follows the MSCI Saudi Arabia IMI 25/50 Index and has an energy weight of less than 0.6%. That is the ETF’s smallest sector allocation. KSA devotes over 72% of its combined weight to financial services and materials names.

After the non-OPEC producers’ cuts, total reduction now represents almost 2% of global supply. The reductions took effect January 1, and the oil producers will reconvene after six months to evaluate the results of the deal.

In a reversal of previous sentiments, Saudi Arabia accepted Iran’s higher output target as a special case. Previous OPEC talks broke down after Iran, which suffered from curtailed exports under strict global sanctions, argued for increasing its output to pre-sanction levels. However, there are some potential problem children within the cartel that could undermine the output reduction effort

Saudi Arabia is eyeing oil at $60 barrel this year, a comfortable price for many OPEC members, but probably not high enough to encourage U.S. shale producers to significantly increase their rig counts. Getting there is another matter.

“The downgrade underlines the difficulties the Persian Gulf economies are still facing since oil prices started declining in the middle of 2014, curtailing these countries’ main source of income,” reports MarketWatch. “Saudi Arabia and its Gulf neighbors have responded with far-reaching economic reforms, including raising taxes and cutting subsidies, in an effort to diversify their economies and become less dependent on oil-price fluctuations.”

KSA, which debuted in September 2015, holds 70 stocks and has just over $6 million in assets under management.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.