Even in the best of times, the Arab World is not a place you’d normally think of as a red-hot investment opportunity.
Yet, I bet you’d be surprised to learn that the Market Vectors Egypt ETF (EGPT) is the single-best-performing stock market in 2014 among the 46 global markets I track on a daily basis.
Given the political chaos in that country, investing in Egypt is clearly a contrarian call, much like, say, investing in Russia.
Yet, there is a group of Arab countries — the Gulf States — that are attracting investors’ attention because they are among the fastest growing and most successful economies in the world. In fact, the Gulf States collectively are the #4 ranked global markets in 2014 and are up 22.22% this year.
No wonder that investor interest in the Gulf States is growing steadily.
In May, iShares launched the iShares MSCI Qatar Capped ETF (QAT) and the iShares MSCI UAE Capped ETF (UAE), the first single-country funds devoted to these red-hot stock markets, after they were upgraded from “frontier market” status.
And Saudi Arabia’s stock market also just surged to six-year highs, after the government announced that foreign investors will be allowed access by the middle of 2015.
Introduction to the ‘Gulf States’
The Arabian Gulf States of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) make up the Cooperation Council for the Arab States of the Gulf — a political and economic union of Arab states bordering the Persian Gulf. Established in Abu Dhabi in 1981, they are still referred to as the Gulf Cooperation Council, or “GCC” states.
The Gulf States owe their initial economic success to winning the geographic lottery. A building and investment boom financed by decades of petroleum revenues has made some of these countries among the fastest growing and wealthiest in the world.
With a per capita gross domestic product (GDP) of around $100,000, Qatar is one of the five wealthiest countries on the planet, trailing only the European micro-states of Liechtenstein, Monaco and Luxembourg, and perhaps Norway.
According to the International Monetary Fund (IMF), growth rates in the Gulf States’ countries are set to remain strong in 2014, with Kuwait expected to grow at 3.1%, Qatar at 5.0% and the UAE at 3.6%. The Gulf States have also moved steadily up the ranks of the world’s most competitive economies, with both Qatar and the UAE now ranked in the top 20.
The Trust Fund Countries Make Their Mark
Like a rich kid born into a wealthy family, the Gulf States’ biggest challenges are how not to waste all the money they are pumping out from the ground.
And to their credit, they have acted quite responsibly. The Gulf States have used their oil wealth to build up their sovereign wealth funds to hold close to $2 trillion of assets. The Abu Dhabi Investment Authority alone boasts over $900 billion in assets. Collectively, that’s more than what China dedicates to similar investments.
Qatar’s sovereign wealth fund, in particular, is making its presence felt around the world. In London, Qatar has purchased the department store Harrods; financed One Hyde Park, the world’s most expensive residential development; and was the primary investor in the Shard, Europe’s tallest skyscraper.
Buying Legitimacy in the Eyes of the World
Say the word “Dubai” to Europeans, and often you get the kind of sniffy response that you get when you say “Texas” or “California.” It is all too vast and new and “artificial” — as if bad plumbing in dilapidated London or Paris apartments were a sign of superior culture and breeding.
The Gulf States have worked hard to establish their credibility by becoming a hotspot for international events. Qatar submitted an unsuccessful application for the 2016 Summer Olympic Games. It was later chosen to host the 2022 FIFA World Cup — though as it turns out, not without a great deal of controversy. Dubai is also hosting the World Expo in 2020.
The Gulf States also have focused on building Western-style educational and cultural institutions. Qatar hosts campuses of U.S. universities like Carnegie Mellon, Northwestern, Georgetown and Cornell Medical School. Neighboring Abu Dhabi is home to New York University and the Sorbonne. It even boasts its own version of the Louvre.
Dubai has established itself as an entertainment and shopping destination for Europeans eager to escape dark winters. On my recent travels, I saw that Eastern European discount airline Wizz Air recently set up direct flights between Budapest, Hungary, and Dubai to service the needs of both vacationers and guest workers.
How to Profit From the Boom in the Gulf States
While the political systems in the Gulf States are hardly the loud and vociferous democracies found in the United States and Europe, the Gulf States offer investors both political and economic stability. There was no “Arab Spring” in the Gulf. Both the UAE and Qatar peg their currencies to the U.S. dollar, while Kuwait pegs its currency to a basket of currencies, also heavily weighted towards the greenback. As a result, currencies have remained stable even as many emerging market currencies have tumbled.
The Market Vectors Gulf States Index ETF (MES), also a current recommendation in my Alpha Investor Letter newsletter, tracks the Market Vectors gross domestic product (GDP) GCC Index, which in turn follows the performance of the largest and most liquid companies in the Gulf Cooperation Council.
In case you missed it, I encourage you to read my e-letter column from last week about what market sentiment is telling us now. I also invite you to comment in the space provided below.