Time to return to GCC equities?

With the prospects of war in Iraq now paralyzing investors like rabbits caught in the headlights of a car, perhaps it is time to look at economic and investment fundamentals. Is there an investment case for GCC equities?

Yes, there is, and investment options do not get much more obvious than this one.

Economic fundamentals are fantastic. Oil revenues for 2003 are likely to outstrip 2000 and be the best on record since 1980.

However, some fear that oil prices will collapse once Saddam Hussein is out of Iraq. Certainly they will return to the Opec price band of $22-28 per barrel but the market will not crash unless Opec lets it crash and that is not very likely.

At this level of oil prices the global economy will begin to recover from its Millennium slump, and boost demand for oil. Meanwhile, the Asian recovery, and ongoing boom in China, will provide a thirsty new market for increased output.

Moreover, as some economists are now beginning to realize the easy money policies of world monetary authorities are inflating commodity prices all round, and devaluing currencies against real assets. This is a new and often overlooked factor, supporting higher oil prices.

If you accept this claim - that commodity prices have now moved decisively out of a 20-year bear market - then GCC equities are the only place to be. An oil boom will benefit all sectors of the local economy and raise profits. Indeed, it happened last year and the year before.

And yet GCC equity prices remain stubbornly low in terms of price to book value, price to earnings ratio and pay good dividends. Now admittedly GCC equities have continued to rise against a background of a slump in global equity markets, but there is plenty more room for growth.

Moreover, those investors now sitting on their hands should ask themselves why? Do they imagine that Saddam Hussein really poses any threat to their security, or will not succumb quickly to the overwhelming military might of the United States and its allies?

Stock markets hate uncertainty and that is why the GCC markets have ground to a halt. But this is all rather irrational, is it not? There is no sign whatsoever that any of the GCC regimes are about to collapse, and they are hardly likely to with their Western allies about to overthrow Iraq.

That seems not to impress investors right now, but standby for the boom in equities once this uncertainty is lifted. GCC markets are presently undervalued at a time when they should be overvalued.