Why investing in the Gulf States makes sense

These are exciting times in the capital markets of the Gulf States with economic reform moving swiftly ahead. In practical terms this means that the rules of investment are changing by the day.

For example, in the UAE a former maximum level of foreign investment in local companies will soon be raised from 49% to 70%. Likewise the local stock market is becoming a more sophisticated beast and insider trading has suffered the wrath of the authorities in recent months.

Meanwhile, the oil boom continues and oil revenues in Opec countries will be $300 million this year, three times the level of 1998. Moreover, there is a considerable reluctance to invest this money overseas, although much of it will find its way back into Western and Eastern capital markets, and so this flow of funds guarantees that local capital markets will continue to boom.

However, the old adage that by the time you have noticed an opportunity it may already be too late applies. Certainly in Saudi Arabia and Kuwait the good news about the future all looks to be in the price of local stocks, and price-to-earnings ratios are sky high.

On the other hand, the market p/e of 12 in the UAE seems ludicrously cheap for a country producing two million barrels a day of oil at $50 per barrel, and a solid programme to boost output to 2.6 million barrels per day by 2006. There is also at least $50 billion being invested in Dubai real estate at present, creating a boom for many allied businesses.

Recent IPOs in the UAE have been massively oversubscribed, and we are promised $1.5 billion in new issues over the next year. This will help to broaden and deepen the local capital markets as will the arrival of the Dubai International Financial Centre.

Thus shares in the UAE look a very good investment right now. There is no need to look at China or India. Remember the local residents of those countries also bought into the market before anyone else heard too much about it, and do the same in the UAE.

After that the word in the market place is that Qatar is planning to open up its companies to foreign ownership before the end of the year. This would be a nice diversification from the UAE, though the same energy-rich assets underpin the strength of the local economy.

When is the party likely to be over for shares in these Gulf States? Well, nothing lasts forever, but the likely continuation of high energy prices in the immediate future puts a floor under stock prices for the moment, and is likely to pull the bottom out of global equity markets sometime soon!