With the price of a barrel of oil nudging $100, the oil-rich Gulf states – with 40% of the world’s oil reserves to fall back on – are sitting pretty. But that doesn’t mean that Middle Eastern governments are banking entirely on oil for their future. Far from it.
Take Dubai. There, local authorities have long been preparing themselves for the day the oil runs dry. In the last two decades, Dubai has turned a small village into a forest of skyscrapers destined to be the financial capital of the Middle East.
And it’s not alone in its ambitious visions of a diversified economy. All over the Gulf, governments are planning huge infrastructure investments with an eye on spending their oil money on building a future. “Around $500bn will be spent on infrastructure over the next three years,” Claire Simmonds of JP Morgan tells The Sunday Times.
One of the immediate results of this wave of cash has been a surge in growth. The region’s GDP rose by 5.3% last year and analysts are forecasting 6% this year, something that is leading to the fast emergence of a consumer class. All this adds up to a compelling investment story.
It doesn’t come without risk, of course – Justin Urquhart Stewart of Seven Management notes that the region’s markets are small and illiquid, while its geopolitics are prone to disaster. And some economies in the region have run ahead of themselves a little. The Saudi and Dubai markets have scaled valuations of 50-times earnings in the last few years, although they have fallen back to 16 and 18 times recently. However, with Gulf governments looking to find good ways to spend a $1.5trn cash pile, there is still good money to be made.
The JP Morgan Middle East Fund has certainly done well from the Egyptian story. With Orascom Construction and Orascam Telecom among its largest holdings, it has returned 138% over the last three years.
James Gotto, manager of the Schroder ISF Middle East Fund, which has favoured Egypt, Qatar and United Arab Emirates since it was launched in September, is also optimistic on the prospects for consumer spending and demand for banking in the region.
Another Luxembourg offering, Fidelity’s Emerging Europe, Middle East and Africa Fund, has set out its stall recently, returning 16% so far this year (you should be able to access all these Luxembourg-domiciled funds via an IFA or broker).