If the members of the Gulf Cooperation Council, an economic bloc made up of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates feel a bit ignored it is easy to see why.
None of them are at war and none of them are likely to be any time soon. As a group they have the world’s largest current account surplus. Combined they already have the world’s 16th largest economy and by 2015 they should find themselves in the top ten.
Yet no one seems much interested. The media, when it looks at the region, invariably focuses on the political nightmares of the Council’s recalcitrant neighbours in Iran, Iraq and Israel. The result is an endless stream of miserable headlines.
This is a shame. Thanks in part to the rising oil price, there’s a great business story – and a great investment story – here for those prepared to look beyond the popular headlines…
Back in 2000 things didn’t look so good for the GCC. The Arab-Israeli War, the Iranian revolution and Iran-Iraq war that followed had all helped stoke oil prices in the 70’s and 80’s, leading to a surge in production and a subsequent rise in the oil price. This had had predictable consequences: thinking the party would never end, instead of investing their windfalls wisely the Gulf oil producers squandered it in spectacular style, showing a particular penchant for tanks, fighter planes and guns.
Then the oil price plummeted: overproduction pushed it from $28 per barrel to $10 a barrel in six months in 1986. The results of this were equally predictable: economies tanked and unemployment soared. Indeed only a few short years ago, back in 2000, the GCC countries were still suffering from their oil hangovers.
No more. With oil now trading at $66 the profits are once again pouring in. Their current account surplus is a massive $207billion – that’s up from $52 billion in 2000 when the oil price was hanging below $30 a barrel. And with global oil demand set to continue this year, the GCC’s coffers should be ringing for some time to come.
This time round however it looks like the GCC have learnt their lessons: instead of chucking it at the defence firms of the West they are using it to invest in their own infrastructures with a view to sowing the seeds for a future prosperity that isn’t dependent on the oil price. And also – with a bit, or perhaps a lot, of luck – creating the kind of employment that will halt the spread of radicalism through the region.
For examples of what the GCC governments have in mind look to cities such as Abu Dhabi and Dubai where Islamic finance and tourism are already bringing in new revenues. Note too that according to the Institute of International Finance the non-hydro carbon sector currently contributes 53% of the GCC’s GDP. That’s down from a high of 76% in 1998.
This is a trend that the analysts expect to continue moving in the right direction. In a recent report – ‘Beyond petrodollars: Globalisation and sustainable development in the Middle East’ – Edward Morse, Chief Energy Economist at Lehman Brothers’ claims that ‘the six GCC countries could be on the verge of overcoming oil dependency.”
“Having seen nominal GDP growth hovering near 20 per cent for the past four years, and given our forecast of sustained high oil prices, we expect these growth levels to continue through this decade,” he goes on. “If the investment off the back of this is sustained, then I expect to see a new Middle East that is a critical engine of global growth.’
All this is fabulous news for companies such as Caterpillar (CAT: US) the world’s biggest manufacturer of earth moving machinery. The US economy – its main market – might be slowing but it has already begun opening plants through Asia in anticipation of greater growth in the Middle East and Asia. On a forward p/e of 14, that probably makes it worth a look.
It is also good for the global construction companies we tipped in a MoneyWeek cover story back in November, Where’s all the oil money going? (/file/21378/wheres-all-the-oil-money-going.html), although we aren’t sure we’d be buyers of all of them now – they are no longer cheap.
One we might still think about picking up however is Netherlands based but NYSE listed Chicago Bridge & Iron, recently tipped by Jim Cramer on CNN’s Mad Money. It won $130m worth of new contracts in the first quarter of this year alone, $40m worth of which were in the Middle East. ‘They do a lot more business in the Middle East than almost anyone,” said Jim Cramer on Mad Money. Yet the shares haven’t yet seen anything like the performance of their peers in the sector.’ It’s time for CBI to play catch-up.’
Turning to the stock markets…
In London, the FTSE 100 closed 31 points lower, at 6,632, yesterday as concerns over interest rates in both Europe and the US hit investor sentiment. United Utilities led the FTSE risers with gains of over 3% on news that it is to sell electricity distribution assets. Conversely, Intercontinental Hotels fell by over 3% after comments from CEO Andrew Haslett talking down the sector’s attractions for private equity groups. For a full market report, see: London market close
Elsewhere in Europe, the Paris CAC-40 shed 47 points to end the day at 6,078 and the Frankfurt DAX-30 was 56 points lower, at 7,919.
On Wall Street, stocks closed sharply lower. The Dow Jones was down 80 points to 13,595. The tech-heavy Nasdaq closed at 2,611, a 7-point fall. And the broader S&P 500 was 8 points lower, at 1,530.
In Asia, the Nikkei ended Wednesday’s session in the red, falling 12 points to close at 18,040. However, the Hang Seng was boosted by energy issues CNOOC, CNBC and PetroChina, which helped take the Hong Kong index 96 points higher to a close of 20,939.
Crude oil was unchanged at $65.61 this morning whilst Brent spot had risen to $17.29.
Spot gold had risen to $670.60 – up from $669.20 in New York late last night – and silver was little-changed at $13.73.
Turning to the foreign exchange markets, the pound was at 1.9915 against the dollar and 1.4732 against the euro, whilst the dollar was at 0.736 against the euro and 121.24 against the Japanese yen.
And in London this morning, a survey by Nationwide revealed that UK consumer confidence has risen to an 18-month high. Britons are increasingly optimistic about their jobs and the economy, although there are some signs that consumers are cutting back on their spending and borrowing.
And our two recommended articles for today…
Why it’s time to go shopping for gold
– South African gold miners are digging deeper and deeper as output falls. But whilst the world’s supply of cheap gold is coming to an end, the supply of cheap money grows greater every day. For more from Adrian Ash on how a combination of factors – from South African mines to London’s private equity bubble – are coming together to make gold an attractive investment, click here:
Why it’s time to go shopping for gold
How to avoid Asian asset bubbles
– Asia is brimming over with foreign currency reserves – and bubbling over with excess liquidity. Yet China and the region’s other developing countries lack the financial services and policy infrastructure to cope. Stephen Roach suggest three ways to restabilise the region: How to avoid Asian asset bubbles