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As I mentioned yesterday (Thursday) in Part One of this story about Middle East investments, instability makes investing in this tumultuous region fairly tricky. But that doesn't mean you ought to avoid it entirely.
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.
Take social networking as a chief example.
A recent Wall Street Journal article reported on a company called Peak Games, which was formed in October 2010 to develop social networking games for Turkish, Middle Eastern and North African markets. The move was based on the fact that Turkey is now the world's fourth-largest market for Facebook Inc., with 28 million users. That trails Great Britain's 30 million subscribers by only a slight margin.
In just over eight months, Peak has created 10 Facebook games in regional languages, signed up 11 million users and attracted $5 million in expansion capital from German investors.
The total number of Facebook users in the Middle East is now estimated at 55 million, with some experts projecting growth to 250 million by the end of 2015. That's prompted a number of other gaming companies, including the world's largest social gaming developer, Zynga Game Network Inc., to also target the market. Coincidentally, Zynga could soon be joining the likes of LinkedIn Corp. (NYSE: LNKD) and Groupon Inc. by going public.
Part of the growth in the social-networking sector is due to social conventions in the region.
"Women and girls in Middle Eastern territories can't visit clubs and bars to meet people, so an online social environment is incredibly appealing," Rina Onur, founder and chief strategy officer of Peak Games explained to The Journal.
Another key element has been the increased availability of credit cards. Greater availability of credit has major implications for online commerce, as well as traditional brick-and-mortar retailers trying to move beyond the street-bazaar marketplaces that long have dominated the region.
Still, despite the rapid growth occurring in the technology sector, a wealth of commodities remains the region's greatest asset.
Four Potential Middle East Investments
Oil and natural gas continue to dominate Middle East commodity production, but the region is not without other natural resources. According to the U.S. Geological Survey (USGS) Mineral Resources Program, Jordan ranks 7th globally in potash production, Morocco is 7th in cobalt production, Saudi Arabia is 9th in gypsum output, Turkey is 10th in dolomite mining and Qatar ranks 15 in global ammonia production.
One of the best ways to profit from this bounty would be to invest in companies that extract and transport raw materials. Two good candidates would be:
- PetroChina Company Ltd. (NYSE ADR: PTR): As China's leading oil and gas supplier, this company also offers diversification to offset the regional risks it will face as a lead partner in a consortium of foreign companies charged with restoring Iraq's Ramaila oilfield to full production. PetroChina earned $12.12 a share last year and the stock pays a dividend of $4.22 a share – a yield of nearly 3%. At $139, the stock is well off its 52-week high of $158.83.
- Overseas Shipholding Group Inc. (NYSE: OSG): OSG is a major shipping company with an emphasis on transporting oil and gas. It currently owns or operates a fleet of 106 vehicles, with 23 more under construction. OSG could see some big gains if unrest in Egypt led to a closure of the Suez Canal. That would almost certainly hike oil prices sharply. It would also cause a surge in shipping demand and add thousands of miles to delivery routes, greatly increasing the daily lease and rental rates for vessels, as well as the number of days required for shipping. That would quickly turn the loss OSG suffered last year into future profits. In the meantime, the company's $1.76 dividend provides a very attractive yield of 6.93%
Here are two more companies that make for good investment choices:
- Aeroflex Holding Corp. (NYSE: ARX): A maker of radio frequency and microwave circuits and other equipment for wireless data transmission, Aeroflex recently signed contracts to establish or upgrade several networks in the Persian Gulf region. The company has run in the red for the past three years, but the losses have gotten consistently smaller (just 12 cents in fiscal 2010) and the new business from the Middle East should turn the company profitable this year.
- Tiffany & Co. (NYSE: TIF): Long a favorite among the Arab oil-rich during their travels to America, Tiffany will have several outlets in the new tourist and commercial districts in the United Arab Emirates (UAE). The company's online sales should also grow as the Internet gives more Middle Eastern consumers access to products they previously couldn't reach. Tiffany's business in U.S. and Asian markets is also rebounding strongly from recession slumps, and earnings for the last year came in at $2.99 a share. The $1.16 dividend provides a current yield of 1.58%.
Certainly, investing in the Middle East carries risk, but you can mitigate that risk by taking advantage of reputable overseas companies that have significant operations in that volatile region.
News and Related Story Links:
- Money Morning Defensive Investing Series:
Defensive Investing Series Stories
- Money Morning Archives:
Encyclopedia entry: Cooperation Council for the Arab States of the Gulf
- International Monetary Fund (IMF):
- International Monetary Fund (IMF):
World Economic Outlook (WEO) Report
- The Wall Street Journal:
Investors Look to Turkey, Middle East for Next Wave of Social Games
- The Washington Post:
Risk-tolerant China investing heavily in Iraq as U.S. companies hold back
- U.S. Geological Survey (USGS):
- ETF Daily News:
Capital Leaving the Middle East and Looking for Safe Havens in Hard Assets and Oil
Middle East ETFs Head-to-Head: GULF vs. MES
- RF Globalnet Newsletter:
Aeroflex and Sequans Partner WiMAX Test Product Development and Deployment