Are the new regional funds a good buy?

All the GCC stock markets combined together have a smaller market capitalisation than Microsoft. That implies that either Microsoft is overvalued or that GCC stocks are too cheap!

More seriously, behind the valuation of both are annual profits and the expectation for profit growth, and the regulatory framework of their respective markets.

On this reckoning Gulf stocks probably win. As NBD General Manager R. Douglas Dowie points out the GDP of the Gulf countries is $510 billion and has been growing by 11% a year since 1999. He notes that Arab stock investors have seen their wealth rise by more than $111 billion in the first eight months of the year.

Microsoft investors have barely seen their stock price rise in five years. Small wonder that many GCC residents have started to look at their own capital markets for investment opportunities.

Moreover, the regulatory framework of the Gulf capital markets is showing tangible evidence of considerable improvement with major reforms in hand in Saudi Arabia and the UAE, while US regulatory authorities have been hard pushed to explain the recent Enron, WorldCom and other financial scandals.

Yet emerging stock markets are notoriously volatile, given to massive upswings and crashes. There was a severe downturn in the UAE and Oman as recently as 1998-99 and those who bought shares with large loans lost their shirts, and much besides.

One benchmark is the value of a stock market in relation to GDP with 120% considered a reasonable level. On this indicator Saudi Arabia at 74% and the UAE at 50% have some way to go, while Kuwait is looking expensive at 147% and Oman very cheap at 31%.

Perhaps the trick is to balance funds carefully between markets and to pick the growth stocks. That is certainly what the NBD fund managers intend to try to do.

The risk, of course, is that a downswing in oil prices - as in 1998 - suddenly hits the GCC stock markets, and the higher they go the harder will be the fall.

On the other hand, if oil prices continue to hold above the previous Opec price band then windfall profits may become the standard, which will more than justify higher share prices in some GCC markets.

However, as part of a diversified portfolio taking a risk on the economies of the Gulf region looks a reasonable thing to do in the current investment environment, and the help of an expert fund manager is probably a good idea for all but the most financially gifted.