Tomorrow's Emerging Markets

By Jane Bryant Quinn
Sunday, April 13, 2008

For the past 25 years, Southeast Asian stocks dominated the dreams -- and the winnings -- of emerging-market investors. Today, those economies are looking more like those of the developed world.

So where should players look for the next ground-floor opportunity? Follow the money, of course. The next quarter-century belongs to the Middle East.

The Persian Gulf states restrict foreign stock ownership. So far, it has been a game primarily for hedge funds and private equity. But the Middle East is opening up to homegrown investors and international capital. In September, T. Rowe Price launched the Africa & Middle East Fund -- the first chance for many U.S. investors to take a shot at markets that they never heard of but that, eventually, will make a splash.

Your targets are the economies of six Arab states -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (the UAE consists of seven city-states of which the best known are Abu Dhabi and Dubai). They're gathered into a loose confederation known as the Gulf Cooperation Council (GCC). The GCC just negotiated a free-trade agreement with Singapore, its first with a country outside the Middle East. In December, it announced plans for a GCC common market.

If you think of the gulf states as mostly camels, oil, sand and war, Google "Dubai image" or "Abu Dhabi image" and goggle at what you see. Skyscrapers, stunning hotels and resorts, marinas, golf courses, high-end malls and, yes, bars. Politically, they are poster children for moderate Islam in the Middle East, with religious but cosmopolitan cultures. Jihad looks like yesterday in countries embracing commercial modernity.

The main event is oil and natural gas -- commodities in tight global supply and whose price the GCC can influence. It's "perhaps the most compelling seller's market in the history of capitalism, providing a relatively uninterrupted transfer of wealth to suppliers of oil," said Jay Sellick, managing director of 13D Research, a global research firm in Boca Raton, Fla.

Developed countries will have to import ever more gas and oil from the Middle East, even during economic slowdowns, because they are producing less themselves. Developing countries need more, too, as their standards of living rise. "We believe the GCC equity market could be in the early stages of a huge bull market, not unlike other bull markets that were driven by changing secular dynamics not fully appreciated by investors," Sellick said.

Oil is far from the only story. The GCC is investing hundreds of billions of dollars to diversify its countries' economies, create jobs for their young people and prepare for the day when they run short of oil and their customers develop alternative sources of energy.

They are raising world-class hotels, promoting tourism, creating financial and tax-free trading hubs, relaxing restrictions on businesses and foreign ownership, developing industries such as petrochemicals that need low-cost energy, and backing centers for high technology.

"A year ago, international investors just flew in for a day," said Fahmi Alghussein, executive director at Morgan Stanley in Dubai. "Today, they're setting up shop in the region and putting asset managers on the ground."

Here's just a taste of what's going on:

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