The Sunday Times: Invest in the Gulf, but not just for oil

With crude prices at a high, investors are starting to take notice of this booming region

November 4, 2007
Clare Francis

THE oil price powered to new highs last week, hitting $96 a barrel on Thursday, and many analysts believe it could breach the $100 barrier this week.

However, now may not be the best time to bet directly on the oil price. Many analysts think it is just a short-term spike.

Goldman Sachs, an investment bank, recommended last week that investors take profits from oil because it expects the price to fall back to about $80 early next year.

Another way to profit is by investing in the countries reaping the benefits of several years of relatively high oil prices. Even if the value of black gold falls back to about $80, this is still significantly more than the $24 a barrel it was in 2002.

The Middle East is home to 40% of the world’s known oil reserves, yet few British investors have exposure to the region.

Part of the reason is that is has been very difficult to access the area – many countries have not allowed foreign nationals to invest. However, the region is slowly opening up. In the past five months, Schroders and Fidelity have launched funds with exposure to the Middle East and advisers believe other investment houses will follow suit.

Mick Gilligan at Killik & Co, a wealth manager, said: “This is a really interesting area and we are only at the beginning in terms of opportunities for retail investors.”

Investing in the Middle East is not for the fainthearted, though – geo-political tensions threaten stability and the stock markets can be volatile. The Saudi Arabian index surged by 111% in 2005, but fell by 49% last year.

Having said that, a growing number of analysts believe there is a compelling growth story which could deliver impressive rewards for investors.

Alan Conway at Schroders said: “The Middle East is about far more than just oil. The economies are growing very strongly and we are seeing huge investment in infrastructure as states seek to reduce their dependency on oil.”

The gross domestic product (GDP) for the region as a whole grew by 5.3% last year and it is forecast to increase by 6% next year – double that of the UK. Qatar grew by 7.7% last year and is expected to expand by 6.3% this year and 8% next year, Citigroup predicts.

Growth is being fuelled by huge government spending as the authorities look to invest their petrodollars. In the past most of this wealth has been invested in Europe and America, but governments are now looking within the region as well.

Claire Simmonds at JP Morgan Asset Management, which has a Middle East fund, said: “The primary trend is that money is staying in the region. Around $500 billion will be spent on infrastructure over the next three years.”

Real estate and construction are the big stories with most authorities in the region ploughing funds into building and improving roads, rail networks and airports.

Muwaffak Bibi, head of Middle East and North Africa at Citi private bank, said: “You only have to look at what is happening in Dubai to see how the Middle Eastern states are seeking to diversify and reduce their dependency on oil.”

Halliburton, the oil services company, has recently moved its headquarters from New York to Dubai and many multinational firms have opened large regional offices there. However, Dubai’s neighbours are not taking this lying down – they too are battling for regional supremacy.

Saudi Arabia is investing $642 billion over the next 13 years in infrastructure projects. It recently opened its markets and allows nationals of the five other Gulf Cooperation Council states – United Arab Emirates (UAE), Kuwait, Qatar, Oman and Bah-rain – to invest. Other foreigners are banned from owning shares.

It is the restrictive nature of many states in the region that has made it so difficult for British investors to get exposure there. However, things are improving – the UAE, Kuwait and Qatar all allow foreign investment. Even so, it is still very difficult to buy shares in individual companies.

Killik & Co is registered with the Dubai Financial Services Authority so it can trade on the Dubai exchange – the only British private client broker that can.

Killik’s Graham Neale said: “We wanted to give clients access to the area because we believe that there are some exciting investment opportunties. These will increase as more firms list on the Dubai exchange.”

Neale’s favourite stock is Emaar, Dubai’s largest property firm. The share price has fallen by about 4% this year, compared with the Dubai market’s 12% rise. However, he believes it looks good value and should perform well. It is building the world’s tallest tower, Burj Dubai, and has regional ventures in Egypt, Syria and Saudi Arabia.

Because it is still difficult to buy shares direct, most advisers recommend a managed fund. Gilligan likes JP Morgan Middle East, which has risen 138% over the past three years, according to Morningstar, a data company.

Shuaa Asset Management also offers a range of Middle Eastern funds, although profits are taxed as income rather than capital so Gilligan said they are only attractive to British investors if held in a self-invested personal pension.

Shuaa’s funds include Arab Gateway, with exposure across the region. If you want to back a specific country, it has Kuwait Gateway, Emirates Gateway and Oman Gateway schemes.

However, Justin Urquhart Stewart at Seven Investment Management thinks the area is too risky. He said: “I think local markets are still too illiquid, so I would wait for more opportunities to open up before investing.”

Iain Armstrong at Brewin Dolphin, a wealth management firm, suggests investing in UK firms that derive revenues from the region. One such stock is oil giant Shell. It is involved in exploration in Qatar, Saudi Arabia, Libya and Iran. Shell’s share price has gone up 10% this year and closed at £20.34 on Friday.

Another stock Armstrong tips is Wood Group, an oil services firm that has a contract to manufacture pressure pumps in Saudi Arabia. It also has operations in Kuwait. Shares cost 420.5p and have risen 80% this year.

Serco, the support services provider, recently won the contract to operate the Dubai Metro, which will be the world’s largest underground network. Serco’s shares ended the week at 439.75p.

http://business.timesonline.co.uk/tol/business/money/investment/article2799437.ece

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