Saudi Arabia’s Futuristic City and How We Can Benefit from It

The Saudi Arabian Crown Prince Mohammed bin Salman announced plans to build a new city called ‘NEOM’, with an investment of about half a trillion dollars. This is one of the many steps being taken by the Prince to reduce the Kingdom’s dependency on oil. Let’s know more about this project and see if we can benefit from this.

Key observations

  1. Saudi Arabia announced building a futuristic city, called NEOM
  2. This is part of the Vision 2030 plan of the Crown Prince
  3. If successful, this project can wean away Saudi Arabia’s oil dependence
  4. We can trade this turnaround in Saudi Arabia through an ETF

What does the name NEOM stand for?

Though NEOM sounds like a name taken from the latest sci-fi movie, in reality, it is formed by a mix of Latin and Arabian languages.

According to Al Arabiya, the first three letters of the name, ‘NEO’ means ‘new’ in Latin and the letter ‘M’ is an abbreviation for ‘Mostaqbal’, which means ‘future’ in Arabic.

Where will it be located and how big is it going to be?

NEOM will connect to Egypt on one side and Jordan on the other, making it the first private zone that is expected to span in three countries.

The mega city will be built over an area of 10,230 square miles, making it 33 times bigger than New York City.

What does the city plan to achieve?

“This place is not for conventional people or conventional companies,” Prince Mohammed told an audience of investors gathered in Riyadh. “This will be a place for the dreamers of the world,” reported The Washington Post.

It will entirely be powered by renewable energy, have driverless cars, be drone friendly, with a lot of robotics being used for various activities.

“Robots,” said Marc Raibert, the CEO of Boston Dynamics, to the conference crowd, “could perform a variety of functions, covering areas such as security, logistics, home deliveries and even looking after the elderly and infirm,” in NEOM, reported The Washington Times.

Through this project, the Crown Prince aims to provide direction to the younger generation of Saudi Arabia and keep them away from the restlessness building in the region.

“Seventy per cent of the Saudis are younger than 30. Honestly, we won’t waste 30 years of our life combating extremist thoughts. We will destroy them now and immediately,” said Prince Mohammed, reports news.com.au.

Currently, the public sector is the major employer of the Saudi’s, which eats up about 50% of the nation’s total expenditure. However, the Vision 2030 plan aims to shrink it to only 20% and this will need a large private partnership. NEON is a step in that direction.

The new city is being modeled on the lines of Dubai, a duty-free zone. If all goes according to the plan, the mega city is expected to earn a GDP of $100 billion by 2030. In 2016, the oil-rich nation had a GDP of $646.4 billion.

Therefore, NEON, if successful, will be a major source of revenue for Saudi Arabia. The project will be spearheaded by former Alcoa boss Klaus Kleinfeld.

What are the reservations of the Western investors?

Though the dream project of the Crown Prince has huge aspirations, the western world will be closely looking at the execution because the previous projects have not been very successful.

The King Abdullah Economic City in Rabigh, which was built to house about 2 million people, hardly has 5,000 permanent residents, according to the Capital Economics report. The Kingdom ranks 94th out of 190 nations in the World Bank’s ranking in ease of doing business. Its ranking is way lower at 158, in trading across borders. Hence, for this project to be successful, Saudi Arabia will have to make a lot of changes to become business friendly.

Though the Crown Prince has promised that NEON will operate independently, without any interference from the “existing governmental framework”, investors will want to see it being implemented.

After all, it was only last month that the Saudi Arabia allowed women to drive, the last nation in the world to do so.

The Crown Prince, however, has promised that the oil-rich nation will be shifting to a more moderate version of Islam. If he follows his words with actions, then maybe he has a winner in his hands.

With all the technology being touted, will digital currencies also find a place in it?

This is just a thought, that if the city is being planned for dreamers, wouldn’t it be nice that instead of using the age-old fiat currencies, Saudi Arabia leads by example and allows only cryptocurrencies to be used in NEOM.

How can we benefit from this news?

As traders, we look for an opportunity in every news that we read. Though a long-term prospect, but a good one nonetheless.

The Tadawul All Share Index (TASI) of Saudi Arabia mirrors the performance of crude oil and rightly so. After all, the Kingdom gets a Lion’s share of its revenues from oil. Therefore, while most stock markets around the world are way above their 2007-2008 highs, Saudi Arabian stock markets are struggling.

Currently, the TASI is about 40% below its 2014 highs, when crude oil was ruling above $100 per barrel.

However, we believe that the bottom is in place for crude oil and it is likely to rally in 2018. Also, if the Crown Prince can follow up this announcement with some concrete action, the index should recover. Therefore, we can put a small portion of our portfolio into an ETF which has a significant exposure to Saudi Arabia.

KSA iShares MSCI Saudi Arabia Capped ETF offers us an opportunity to access the growth in the Saudi Arabian market.

Since its launch, the ETF has largely been range bound between $20 and $27. Currently, it is falling towards its critical support of $24. The ETF has not broken below this level in 2017. Therefore, we can buy KSA around $24 levels, once it shows signs of stabilization.

If the ETF breaks out and closes above the range, its next target is $34. We can keep an initial stop loss of $19. Our risk to reward ratio is 1:2.

However, this is a long-term investment and a contrarian bet. We are trying to buy a possible future turnaround of a nation, which currently is struggling with the impact of low crude oil prices.

Risks to our assumption

Our trade is based on two important assumptions. One, crude oil prices will move higher next year and second, the Crown Prince will implement his Vision 2030 plan.

However, NEOM needs huge investment. If crude oil prices plunge, then Saudi Arabia will struggle to fund this project. Additionally, private investors will also shun it. As a result, the project will fall into a limbo, hurting our investments.

The geopolitical tension in the region can pose a challenge for successful completion and implementation of this project.

Featured image courtesy of Shutterstock.

Author:
Rakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.