Nick Wilson reviews the range of investment opportunities in the Gulf region.
The economic progress of countries in the Gulf region is reliant on the oil price. True or false? Increasingly, it’s false.
First, some places in the Gulf, such as Dubai, have relatively little oil but have still prospered through trading, tourism and financial services. Other states, such as Qatar, which has the third-largest reserves of gas in the world, have for many years adopted policies of diversifying their economies away from hydrocarbons. This is increasingly the route taken by all the main Gulf economies, which together make up the Gulf Co-Operation Council (GCC) of Kuwait, Saudi Arabia, Qatar, Oman, the United Arab Emirates (UAE), and Bahrain.
Such policies make sense for nation-builder governments, and, happily, for investors. From the point of view of the state, a diversified economy has greater resilience, more social cohesion, wider opportunities for growth from different sectors, and defensive qualities, particularly as the world seeks to wean itself off fossil fuels.
From an investor’s point of view there is a much wider range of investment opportunities since the bulk of oil and gas businesses in the region are owned by the state and, to date, have been largely uninvestable.
GCC governments are taking steps to make their stock markets attractive to international investors. Raising foreign ownership limits in listed companies, enhanced corporate governance, and improvements to local stock exchange rules mean that the region’s markets are being upgraded by index providers from frontier market to emerging market status.
In the past year, Saudi and Kuwait were reclassified as emerging markets by the index providers MSCI and FTSE Russell. Both Qatar and the UAE have already been upgraded. Commentators focus on the short term “sugar rush” of buying pressure, as passive funds react by raising their weightings as an upgrade approaches. But the longer-term effect is that a far wider range of investors will now have the reclassified country within their investment universe.
Social reform is no less important to international investors. We are seeing incremental improvement. Most notable is Saudi’s relaxation of the guardianship system for women. While Saudi leader Crown Prince Mohammed bin Salman has detractors internationally, his plans to increase female participation in the workplace and improve women’s rights is making progress. Saudi has been a country only since the 1930s, and most of the GCC is much younger. Added to this, the Gulf states have young populations and, unlike much of the developed world, experience enduring population growth.
No surprise, then, that the expanding sectors in the Gulf are those exposed to the consumer: consumer products, entertainment, healthcare and tourism. Increasingly, we are seeing global sporting events staged in the Gulf: the FIFA 2022 World Cup will be hosted by Qatar and the World Athletics Championship has just taken place.
But can this growth compete with the region’s vast oil and gas reserves – currently estimated to be worth around $65 trillion (£50 trillion)?
In terms of today’s value – no. But don’t underestimate the scale of investment in infrastructure. The pipeline of infrastructure programmes planned for the next few years is worth more than $1.5 trillion, with $1 trillion in Saudi alone. This is where the true value of oil and gas as a bedrock national income comes into its own. Gulf states recycle it into major infrastructure projects. These make their economies more attractive for inward investment and also rapidly recycles spending into the local private sector economy and labour force.
In terms of quantum and speed, Europe’s cash-strapped and red-tape bound economies can only watch this infrastructure investment with envy.
From a shareholder’s perspective, the Gulf offers two additional advantages. Stock exchanges in the region embrace the dividend culture, with yields upwards of 4.5% and price earnings ratios below 15 times readily available. In addition, the Gulf markets tend to show less correlation to global equity markets than most emerging markets. Over a 10-year period, the correlation of GCC indices to global indices is low, at under 0.4.
Admittedly, the region has risk factors. The wider Middle East is geopolitically, with security and terrorism never far from the headlines. Governments tend to be autocratic dynasties. Financially, the price of oil is both volatile and vital to government budgets, although gas prices tend to be more stable than most external observers realise.
That said, in recent years GCC states have become more sophisticated about managing their budgets, with the introduction of VAT and a preparedness to access the international bond markets.
Yes, there are reasons why some investors would never consider investing in the Gulf region. But for those who are prepared to accept a level of risk more than justified by the potential returns, the Gulf is an attractive place to put your savings to work.
Nick Wilson is chairman of the Gulf Investment Fund.