Investing in the Middle East: The Best Plays to Make

[Editor's Note: Most investors view the Middle East with skepticism – if not outright fear. In this two-part story, we show you the region's promise – and provide some recommendations that could lead to maximum profits. Part Two will appear in Money Morning tomorrow (Friday).]

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Periodic eruptions of violence and instability make investing in the Middle East fairly tricky. But that doesn't mean you ought to avoid the region entirely.

Indeed, investing in the Middle East can be extremely profitable, as the region currently is one of the world's bright spots for economic growth.

The International Monetary Fund (IMF) said in its World Economic Outlook that the region's economy would expand at a 5.1% clip in 2011. That's well above the 1.5% pace projected for Europe and Japan and the 2.3% rate forecast for the United States.

And contrary to the perception of many Westerners, that growth projection isn't based primarily on the price outlook for oil, which has trended higher for most of the past year. Rather, it's keyed to everything from construction and new-business development to banking, tourism and even Internet gaming.

So let's take an in-depth look at each sector, as well as some specific companies to invest in.


A $700 Billion Buildup

Construction is probably the most promising sector when it comes to investing in the Middle East, simply because there is an enormous buildup going on in the region.

For example, Saudi Arabia's King Abdullah bin Abdulaziz Al Saud has launched a massive program to build up to 500,000 new houses for Saudi citizens. That's in addition to the $700 billion of infrastructure projects already underway. At last count, the Zawya Middle East Business Newsletter reported 72 real estate developments in progress with a total value of $331 billion.

Similar infrastructure projects have been started, or are on the drawing boards, in other countries throughout the region, most notably in the member nations of the Gulf Cooperation Council (GCC), which includes Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates (UAE), with Morocco and Jordan potentially joining soon.

Qatar alone is expected to open 35 new hotels this year, and 75 more are already open or about to come online in Abu Dhabi, the capital of the United Arab Emirates.

Citing its "ease of hiring" and favorable tax rates, the international accounting firm PriceWaterhouseCoopers recently named Abu Dhabi one of the world's Top 20 "Cities of Opportunity."

Among the developers targeting the Mideast is Starwood Hotels & Resorts Worldwide Inc. (NYSE: HOT), which just announced a major new Sheraton Hotel for Dubai, the second most populous city of the Emirates and the business and financial hub of the UAE. Already home to the world's tallest office building, Dubai is presently constructing four major residential towers that will be the tallest in the world, as well as constructing a variety of new attractions – including the $235 billion "Dubailand" – aimed at cementing the city's image as a major international resort and global tourist destination.

Image is Everything

Similar growth is expected in the financial sector. Both trading activity and market values have markedly increased in recent years, in part because the countries are investing more of their oil revenues in their own economies rather than putting it in foreign securities and debt instruments such as U.S. Treasuries.

For example, Tadawul – the Saudi Stock Exchange – recently reached a total value of $360 billion (1.35 trillion Saudi Riyals).

Although most Middle Eastern stock exchanges restrict foreign access or have limited listings of public companies, Abu Dhabi and Dubai are trying to change that by forging a new identity as the "Switzerland of the Middle East." Holding themselves up as a haven from the turmoil afflicting some areas of the region, they're aggressively marketing new bond offerings – $7.35 billion worth so far this year – and seeking foreign deposits for UAE banks. New listings also are being actively pursued for the Dubai International Financial Exchange (DIFX), now known as NASDAQ Dubai, which hopes to become the dominant stock market in the region.

The Iraq Stock Exchange (ISX) is also promoting opportunities there, working with foreign advisors to launch a new Cayman Islands-based mutual fund – the Iraq Opportunities Fund – just last October.

How to Profit

Having said all that, there are a number of ways to profit by investing in the Middle East.

Generally speaking, the easiest way to play the Middle East is through exchange-traded funds (ETFs) that track indexes following investments in the region. Two such funds include:

  • The Market Vectors Gulf States Index ETF (NYSE: MES): This fund follows the Dow Jones GCC Titans 40 Index, which tracks the performance of 40 companies either headquartered or deriving the majority of their business from countries in GCC nations. The fund has a market capitalization of roughly $23 million, and at a recent price of $21.99, it is in the middle of its 52-week range of $18.26-$24.43.
  • Wisdom Tree Middle East Dividend ETF (NYSE: GULF): This is a weighted fund that follows Middle Eastern companies that pay regular cash dividends and are listed on a stock exchange in Bahrain, Egypt, Jordan, Kuwait, Morocco, Oman, Qatar, or the UAE. The fund has held up well in the face of the recent turmoil, and at $15.99, it continues to trade near its 52-week high of $17.53.

Until circumstances become clearer in Egypt and Libya, it's probably best to avoid one formerly popular ETF, the Market Vectors Egypt Index (NYSE: EGPT). That fund sold off sharply after the ouster of former President Hosni Mubarak and, while it has bounced off its lows, it remains susceptible to a sell-off on any bit of bad news or heightened uncertainty.

If you're looking to profit from the region's construction boom, you might go with Cemex SAB de CV (NYSE ADR: CX). This Mexico-based company is the world's third-largest cement producer and it helped build much of modern Latin America. Now it is supplying a number of major projects in the Middle East.

Although the company posted a loss in 2010 due to the slow construction rebound from the recession and a default on payments by Venezuela, analysts are projecting a 12-cent profit for the coming year, with a stock price advance above $12. The stock currently is trading at slightly above $8 a share.

Cemex has an added cushion against regional unrest in that it's also supplying major projects in Europe, Africa and Asia, as well as in the Americas.

We'll discuss more opportunities for investing in the Middle East, including several infrastructure companies, tomorrow (Friday) in Part Two of this series.

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