Saudi Arabia's Investment in AI Could Help Boost a Pair of ETFs

As Saudi Arabia is experiencing exponential economic growth, it can utilize its surplus capital by reinvesting in disruptive technologies like artificial intelligence (AI). The country has long been a beneficiary of its vast oil reserves, but AI could help realize areas where it can diversify its economic growth.

“The United Arab Emirates (UAE) and Saudi Arabia have long-enjoyed abundant hydrocarbons reserves, granting them a prominent place in world markets and a strategic position in regional and global geopolitics,” wrote The Economist’s Economic Intelligence Unit. “However, both countries have found it harder than less well-endowed countries to diversify their economies and boost productivity growth. Today, the countries face a mixed outlook, with real GDP growth set to grow slower than in the past decade. Artificial Intelligence (AI) could help to boost diversification and growth in the next decade, and governments in both countries are keen to seize the opportunity.”

Disruptive technology is not relegated to certain sectors as it will permeate into all industries in some form or fashion. For example, augmented reality is technology comprised of digital images superimposed over the real world, and its use is primed to drive industry growth–industries like real estate and manufacturing are already putting the technology to use in a variety of ways.

According to the Harvard Business Review, global firm Deloitte identified seven disruptive forces that leaders should understand and incorporate into their strategy for future growth:

  1. Internet of things (IoT):  disrupting the labor market and forcing employees to be “tech fluent.”
  2. Continued growth of big data via analytics in organizations
  3. “Cyber-physical world” that focuses on efficiency and the automation of manual tasks
  4. Automation and higher-level value creation
  5. The concept of “career” is changing via technology, resulting in a 60-70-year work life with continuous learning and career shifts.
  6. An explosion in contingent work with a distributed talent pool that improves productivity and speed
  7. Diversity and generational change for the workforce

One ETF to consider for broad-based exposure to AI and other potentially disruptive technologies is the ARK Innovation ETF (NYSEArca: ARKK). Investors looking to capture single country strength in Saudi Arabia, they can look to the iShares MSCI Saudi Arabia ETF (NYSEArca: KSA).

More Saudi Arabia Index Exposure

Furthermore, Saudi Arabia’s inclusion in the MSCI Index will help diversify the emerging markets index, which currently has a large tilt towards China and South Korea. After the inclusion of Saudi Arabia stocks, the total allocation towards the country will be at 2.6 percent.

MSCI plans to roll out the inclusion in two steps–one was completed May and the next one is slated for August.

While the majority of investors might have been driven away by the red prices in emerging markets during much of 2018, savvy investors who were quick to see the opportunity viewed EM as a substantial markdown. From a fundamental standpoint, low price-to-earnings ratios in emerging markets ETFs have made them prime value plays as capital inflows continue in 2019.

Saudi Arabia, however, may have been overlooked by investors via KSA. The fund seeks to track the investment results of the MSCI Saudi Arabia IMI 25/50 Index, which is a free float-adjusted market capitalization-weighted index with a capping methodology applied to issuer weights so that no single issuer of a component exceeds 25 percent of the index weight, and all issuers with a weight above 5% do not cumulatively exceed 50% of the index weight.

For more market trends, visit ETF Trends.