Forget Dubai: Two Timely Opportunities To Invest In The Middle East

by Tony D'Altorio

Forget Dubai: Two Timely Opportunities To Invest In The Middle East

by Tony Daltorio, Investment U Research

Tuesday, January 12, 2010

Investors hold to a myriad of catchphrases, proverbs and beliefs about everything from the traditional Santa Claus Rally to buying when there's blood in the street... or passing up on immediate investments into any country that builds the world's tallest building.

Admittedly, there is some truth in that last one - at least in the short term - but it doesn't necessarily hold for the long haul. If it did, the United States stock market would have peaked decades ago.

Of course, the U.S. hasn't held that claim to fame for some time. And on January 4, 2010, Dubai officially opened its 160-story Burg Khalifa, stealing thunder from the previous tallest building in Taiwan.

Further lending credibility to the theory, Dubai ran into trouble late last year as it tried to restructure $26 billion of debt connected to the government-connected Dubai World.

And now, some investors seem wary about investing anywhere nearby because of that.

But while they probably should stay away from Dubai for a while at least, its closest neighbors in the Middle East present what could turn out to be the most significant contrarian plays of the decade...

Fundamentally Sound With Money To Burn

Dubai may have bitten off more than it can chew, but Saudi Arabia, Qatar and Abu Dhabi have a lot more than man-made islands and tall towers to bank on... like two-thirds of the world's oil and 45% of its gas reserves.

With minimal debt levels and over $1 trillion in oil reserves alone, those Gulf nations plan to spend at least $2 trillion on infrastructure projects over the next few years in order to properly diversify their economies.

And unlike the debt-fueled stimulus programs that many developed countries seemed to favor over the last year, Saudi Arabia, Qatar and Abu Dhabi are actually good for that money - even if oil prices drop to $40 per barrel, which they won't.

As prices stand now, Saudi Arabia alone is increasing its reserves by over $350 million each day.

With that kind of backing, it's no wonder that so many companies have eagerly agreed to participate in the infrastructure boom, especially since they already don't have to worry about high taxes or expensive resources in the region. And real estate developers have access to free land as well.

Dubai aside, the financial sector in the region has weathered the financial crisis quite well.

Banks have made sizable provisions and reigned-in lending, with non-performing loans peaking in the next few quarters and a tremendous demand for further lending.

Equity Markets And ETFs In The Middle East

The Gulf region of the Middle East has another factor heavily in its favor...

As Saudi Arabia, Qatar and Abu Dhabi enter the main emerging market indexes in the next few years, foreign investors - who currently own less than 3% - should buy up as much as 57% more.

They pose quite the bargain now too, considering that they dropped by half last year without any significant recovery during the 2009 rally largely because they weren't included in the indexes.

Though Gulf markets have traditionally traded at over 20 times earnings on high profitability and earnings growth, they're only trading at nine times 2010 earnings today.

That's why exchange-traded funds (ETFs) like Wisdomtree Middle East Dividend Fund (NYSE: GULF) and MarketVectors Gulf States Index ETF (NYSE: MES) look particularly good right now.

Wisdomtree allocates its portfolio to:

  • Qatar - 33%
  • United Arab Emirates - 17%
  • Kuwait - 15%
  • Oman - 4%

And MarketVectors takes its profits from:

  • Kuwait - 45%
  • United Arab Emirates - 25%
  • Qatar - 20%
  • Oman - 4%
  • Bahrain - 1%

Like any other market, the Middle East poses certain risks, especially if oil does happen to drop significantly below $40 or if political strife gets out of hand.

Fortunately, it looks good going into 2010 and even beyond, presenting a great opportunity for contrarian investors to get in now while prices sit at historically low valuations.

Good investing,

Tony Daltorio

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