An investor’s guide to the Middle East


middle-east

The Middle East often presents two divergent images to the rest of the world: the war-torn precincts of Baghdad and Cairo and the glittering skylines of Dubai and Doha. For global investors, this dynamic region is home to a variety of opportunities depending on one’s risk tolerance and time frame.

The richest countries in the region are the Gulf Cooperation Council (GCC): Saudi Arabia, United Arab Emirates (UAE), Kuwait, Qatar, Bahrain and Oman. These energy-rich nations are expected to expand by 4.4% in 2014, according to the International Monetary Fund.

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The cash-rich, Gulf economies are also investing heavily at home to develop financial service sectors, infrastructure projects and trading facilities to diversify their economies away energy. In addition, these countries are big spenders abroad, snapping up companies and real estate around the world. By some estimates, GCC countries may have more than $3.5 trillion in FDI holdings by 2020.

ETFs focused on the Middle East have performed well in the last year. Three popular funds are the iShares MSCI GCC ex-Saudi Arabia (IGCC), the iShares MSCI Frontier Markets ETF (FM) and WisdomTree Middle East Dividend Fund (GULF), according to ETF Trends.

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In a recent research note, WisdomTree Director of Research Jeremy Schwartz said that Middle East regional funds received a boost last year after Qatar and the United Arab Emirates (UAE) were upgraded to emerging market status by Morgan Stanley Capital International. “Since then, the region has reached new highs and continues to separate from traditional emerging market indexes,” according to Schwartz, a trend that’s reflected in the following chart.

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That said, the region still has considerable challenges. Many economy remain heavily dependent on oil and gas revenue as a percentage of total government revenue, despite spending billions on infrastructure projects.

Check out the following scattergram chart from the Centre for Economics and Business Research (CEBR), a consulting firm.

Gulf Oil Addiction.png

That matters because the shale revolution in North America is starting to change the dynamics of the international oil industry. Hydraulic fracturing has boosted U.S. oil and gas production and the International Energy Agency has forecast that the U.S. will emerge as the world’s biggest oil producer by 2015—and may have already by some estimates. That capacity expansion may keep oil prices in check through the rest of this decade.

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Another problem: Middle East economies have had difficulty educating and employing a big pool of young workers, a point the IMF discussed in a policy paper on the region published last October. As the report’s authors described it:

“A key challenge for the region is to generate jobs in the private sector for the rapidly growing young population. Policies are already being implemented to achieve this objective, but more is needed to limit incentives for public-sector employment, raise educational quality, and make nationals more competitive in the private labor market.”

 According to the CEBR, across the GCC as a whole, 14.4% of executives report that the workforce lacks sufficient skills – more than double the average rate of dissatisfaction across the OECD (6.2%). “Moreover, this problem affects all GCC members – not one country manages to beat the OECD average score,” the consulting firm’s survey data shows.

If Gulf and other regional economies can overcome these economic challenges and develop more stable governments, the future looks bright. Regional economies are exporting more of their resources and goods to the global growth engines of the future: China and India.

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By 2022, estimates the CEBR, the Middle East will be exporting more to emerging markets than to advanced economies. The region has a shot of developing into a key fixture of global trade.

Photo Credit: huskyte77

DISCLAIMER:  The investments discussed are held in client accounts as of February 28, 2013.  These investments may or may not be currently held in client accounts.  The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.  International investing involves special risks, such as political instability and currency fluctuations.  Past performance is no guarantee of future results.

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Xavier Brenner
Xavier Brenner
Xavier Brenner has covered global market, business and economic trends for Interactive Brokers Asset Management since 2013. An experienced financial journalist, Brenner offers analysis and insights on the stories that matter to the discerning investor.