A View From the Burj: Dubai's Economy Fueled by High-Powered Government Investing

By Mike Caggeso
Associate Editor

When flocks of tourists gaze from the top of the world's tallest building - the colossal Burj Dubai, slated to be completed in 2009 - they'll see a swath of construction cranes dotting the skyline and dozens of tankers awaiting arrival/departure from the world's largest man-made harbor.

To the southwest, they'll see - with binoculars - a vast desert spotted with dune buggies and recreational vehicles.

Looking down, they'll see the emirate's eight free economic zones, built to attract foreign companies such as Microsoft Corp. (MSFT), Nokia Corp. (NOK), Siemens AG (SI) and many more.

If they take a tour of the tower, they'll find 30,000 homes, nine hotels, a mall and a man-made lake.

But nowhere will they see remnants of the Dubai of a half-century ago, when the city was better known as a pearl fishing village.

If there is one emblem of Dubai's fast growth, it's the Burj, whose completed height of 2,684 feet is a symbol of the emirate's transformation into the Middle East's financial and tourism hub.

Indeed, the Burj's stated goal "is not simply to be the world's highest building. It's to embody the world's highest aspirations."

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'The World' in its Hands 

That transformation began in 1971, when Dubai was incorporated into the newly formed United Arab Emirates, a coalition of seven Persian Gulf states rich in oil and natural gas.

Foreign investment in the emirates' wealth of resources came easily, and the UAE quickly became a prosperous nation situated on one of the main waterways of the Middle East.

However, unlike its fellow emirates and neighboring Saudi Arabia and Qatar, Dubai's source of natural resources is running low. Oil and natural gas contribute less than 6% of its revenues.

Instead, Dubai's Jebel Ali Free Zone, an economic zone with lucrative business and tax incentives, is the primary source for the country's revenues. Increasingly, however, the Emirates are evolving into a tourist destination.

A typical Dubai vacation (or business trip) can include indoor skiing, sand dune cruising, swimming in the Persian Gulf, paying top dollar for a stay on its heralded Palm Islands (predecessor to the soon-to-be completed The World, a man-made archipelago of 300 islands) and shopping during the heralded, month-long, citywide Dubai Shopping Festival.

Instead of oil, the economy has shifted its focus to services, and real-estate prices have cycled higher, in kind. The value of Dubai real estate is evident in the enormous skyscrapers and hotels, such as the Burj Dubai and Burj Al Arab, one of the world's tallest hotels and the world's only (self-proclaimed) "7-star" hotel.

Disneyland, Meet Wall Street

But this display of wealth can only go do so much to attract tourists, as Dubai city needs to develop larger sources of income - the kind that builds more skyscrapers.

And that's where global investments come into play. Dubai's government plays a very active role in the country's economy. In the past year, Dubai's sovereign wealth funds - controlled by the emirate's ruler and UAE Vice President Shiekh Mohammed bin Rashid Al Maktoum - have doled out serious cash for projects around the world, including:   

  • $448 million for a stake in a Malaysian super city,
  • $1.26 billion in hedge fund Och-Ziff Capital Management Group LLC's (OZM) Oct. 2007 initial public offering,
  • $5.1 billion for a 9.5% stake in MGM Mirage (MGM),
  • $942.3 million for Barneys New York Inc. luxury department stores,
  • $1.8 billion for two U.S. aviation-maintenance companies owned by The Carlyle Group, the noted Beltway buyout firm,
  • An undisclosed sum for a stake in Japan's electronics and media juggernaut Sony Corp. (SNE).

Unlike other funds that "get strategic," Dubai is approaching its investment strategy both as a business, and as a means to an end - a business double-play that's virtually certain to make it a winner with one or both of its strategic mandates.

With these kinds of big-time investments, Money Morning calls sovereign wealth funds, whether they're from Dubai or elsewhere, "Global Cash Barons."

Following Cash Barons for Long-Term Profits

For U.S. investors, the problem with the government's close attention to the emirate's revenues is that relatively few public companies are listed overseas, let alone on the New York Stock Exchange.

Add that to the lack of liquidity in the young Middle Eastern indices, and all this talk about the burgeoning Middle East is a giant tease for U.S. investors.

Later this year, Middle East ETFs will be available, but for now, the best way to invest in Dubai is to shadow invest in the companies it - along with other sovereign wealth funds - is pouring billions into.

The investments that these massive cash pools make over the next 12 months will be some of the biggest profit opportunities investors will ever find. Shrewd individual investors would do well to closely watch the moves they make - and follow suit whenever possible.

"Sovereign wealth funds provide an important data point for investors," says Money Morning Investment Director Keith Fitz-Gerald. Despite what critics say, "sovereign funds operate out in the open, and their objectives are very clear. This is in stark contrast to the secret workings of hedge funds, that operate in private, and only divulge their holdings and objectives after the fact."

Many of those Cash Baron investments are U.S.-based companies - some beat down by the credit crisis, others well positioned to profit from global emerging markets such as China, India and Brazil.

Important to note: Cash Barons aren't day traders. They're investing for the long term.

Also keep in mind that investors shouldn't blindly follow every public-company investment of sovereign wealth funds. 

That's why Money Morning has identified two recommendations:

  • Citigroup Inc. (C), the beleaguered financial titan that has received a $7.5 billion cash infusion from Abu Dhabi Investment Authority, nearly $7 billion from Singapore Investment Corp. Pte. and $3 billion from the Kuwait Investment Authority.

"It all comes down to cash flow, as so many things do. And in this case, Citi's valuations have been pummeled at a time when the underlying cash flow really hasn't changed all that much," Fitz-Gerald said.

  • MGM Mirage (MGM), the Las Vegas-based casino-resort operator, whose China strategy received a major boost from the $5.1 billion it received from Dubai.

"At the most basic level, Dubai is hoping to grab a share of the ever-increasing power of the Chinese consumer at a time when China's consumers have not yet formed opinions about branding or luxury travel experiences,' Fitz-Gerald said. "Given that Asian consumers in general - and Chinese consumers in particular - tend to be much more highly brand savvy than their European and American counterparts, this is an especially important strategy to execute at the present time."

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