To invest like a pro in emerging markets, you've got to embrace your inner hypocrite.

It's all well and good as a Westerner to believe in democracy and rule of law. But investors often can make more money in foreign countries -- at least in the short term -- when an autocrat comes to power who can push through investor-friendly policies and programs unopposed: spending on new highways and communications networks, opening markets to competition, easing curbs on trade and capital, slashing budget deficits, divesting state assets.

A case in point is the Saudi Arabian king's round-up last week of prominent businessmen and at least 11 members of his own family on corruption charges, the most sweeping shift in the country's politics in four decades. Among those taken into custody was Prince Alwaleed bin Talal, one of the world's richest men through cannily-timed investments in stocks like Apple Inc. (AAPL) - Get Report and Citigroup Inc. (C) - Get Report

Many debt investors reacted in panic to the sudden and unexpected move, driving up the country's borrowing costs.

But gauges of the country's stock market have barely budged. Since the news of the arrests broke, an exchange-traded fund tracking Saudi shares is flat, even as a broader gauge of emerging-market stocks has slid 1%.

The muted reaction to such a dramatic political transformation shows how sanguine many stock investors remain on Saudi Arabia's prospects as officials try to usher in major changes to the country's economy and society. Priorities of King Salman and son Crown Prince Mohammed bin Salman include weaning the government off an historic reliance on oil revenue and improving a dismal human-rights record through steps such as letting women drive. The leaders also have disclosed plans to sell a stake in the national oil company, Aramco, via an initial public offering. 

"For investors who don't know Saudi Arabia so well, this news will be a rude awakening to the fact that Saudi politics are actually quite unstable," said Marcus Chenevix, a Middle East analyst at the London-based economics consultancy TS Lombard. "But for investors who know the kingdom well, they'll see this as a positive sign for long-term reform."

Trading this week in global bond markets shows how unexpected -- and unwelcome -- the royal roundup was to debt investors. The cost to buy financial contracts protecting investors against debt default for five years jumped to about $100,000 annually, the highest in three months, from $89,750, according to FactSet.

But the upheaval shouldn't have come as such a surprise. Standard & Poor's, the credit-rating firm, noted in an Oct. 6 report that the "opacity of decision-making and reconciling intra-family issues around succession and emoluments reduce the predictability, timeliness and effectiveness of the kingdom's economic-policy choices."

Then again, S&P noted, the regime is noted for its rulers' unfettered power. It is, after all, a monarchy.

"The political system is highly centralized, with limited checks and balances," S&P wrote.

Those arrested, according to TS Lombard's Chenevix, primarily hail from the city of Jeddah on the Red Sea, a rival commercial and power center to the central capital of Riyadh. Prince Mohammed announced last month that the country planned to spend $500 billion -- roughly equivalent to Sweden's gross national product -- to erect a brand-new mega-city on the Red Sea.

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The purge came just months after King Salman upended decades of carefully planned power transfers -- the throne typically passed from brother to brother -- by appointing Prince Mohammed as his likely successor.

In a regime where family interests are difficult to distinguish from the state's, corruption is widespread and endemic, Chenevix said. So the arrests of a targeted group of rivals and other officials suggests that the exercise was really just a ploy by those currently in charge to consolidate their authority.

The new concentration of power should make it easier for the king and crown prince to undertake major changes in the country, Chenevix said. They include plans to curb public spending to reduce a budget deficit that ballooned to 17% of gross domestic product in 2016 following the collapse in oil prices. Another is to enact a value-added tax to raise more government revenue that's not dependent on oil sales.

According to Chenevix, the country needs to increase wages for migrant workers, who occupy most non-government jobs outside the oil industry in sectors such as retail, manufacturing, agriculture and domestic service. The workers also must be able to bring their families to join them; then, Chenevix argues, Saudi Arabia can develop a thriving economy fueled by internal consumption rather than oil proceeds.

"The big risk from Saudi politics is not so much instability or collapse but paralysis," Chenevix said. "You would end up with a situation where no one is in charge and no one faction is strong enough to push through some of these reforms."

Just a week ago, the debt-analysis firm Fitch Ratings laid out a similar logic in a report on Saudi Arabia's A+ debt grade: The new succession plan "has reduced risks to the implementation of the reform agenda," according to the report.

For now, the purge appears not to have resulted in any visible instability. The arrested Saudi princes are being held in an impromptu holding pen at the Ritz-Carlton in Riyadh, the New York Times reported.

Things could always take a turn for the worse. S&P said in its October report that while authorities are likely to succeed in improving public finances, Saudi Arabia's credit rating could take a hit "if we observed a significant increase in domestic or regional political instability."

Moody's Investors Service, another ratings firm, wrote in a July report that "the change to the succession order could potentially prove itself controversial in a political landscape normally governed by consensus-building among the royal family, especially if there were a growing perception that power is becoming excessively concentrated in the crown prince's hands."

For now, though, many investors in Saudi stocks are relieved that the heavy hand is getting the upper hand, democratic values be damned. 

"This type of event forces people to think about the black box that is Saudi politics, and that's intrinsically frightening," Chenevix said. "In reality, most investors don't really want to think about politics at all."

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Editors' pick: Originally published Nov. 10.

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