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How to Profit from the Middle East's Global Economic & Investment Expansion

Stock-Markets / Middle East Jun 09, 2008 - 11:08 AM GMT

By: Martin_Hutchinson

Stock-Markets Best Financial Markets Analysis ArticleMiddle Eastern countries know their oil supplies aren't going to last forever. So they're pumping more than $2 trillion into new, long-term economic projects - such as brand new cities that will function as both business and vacation hot spots. A special report jointly developed by U.K. affiliate MoneyWeek Magazine and our experts here at Money Morning explores the next moves by these economic heavyweights, their spend-happy sovereign wealth funds and how investors can profit from them.


In 2007, the six nations of the Gulf Cooperation Council - Saudi Arabia, Kuwait, Bahrain, Omar, Qatar and the United Arab Emirates - earned $381 billion from oil exports.

And that was back when the average annual price for oil was at a cozy price of under $65 a barrel, compared to our current levels of $138 a barrel.

The cumulative earnings will reach into the trillions if oil remains over $100 for several years. The region literally has more money than it knows what to do with, but that won't last long because oil supplies won't last forever.

That means a lot of that money is flowing into infrastructure.

From Dubai to Kuwait, there's an estimated $2.4 trillion in construction projects either underway or under development in the world's biggest oil patch.

Surprisingly, $1.4 trillion of that is earmarked for projects in civil construction. This means spending on residential and commercial construction projects in the Middle East outweighs construction on oil, gas, power, petrochemical, industrial and water projects combined.

Some of these gargantuan civilian projects include:

  • King Abdullah Economic City, Saudi Arabia: $120 billion. The leading firm is Dubai-based developer Emaar.
  • Silk City Project, Kuwait: $86 billion. The leading firm is Tamdeen Real Estate.
  • Dubailand, U.A.E.: $60 billion. The leading firm is Tatweer.
  • Al-Zorah, a $60 billion coastal city in the emirate of Ajman . The leading firm is Solidere International.

The Saudi Arabian government wants to diversify the Saudi economy away from its current “Three Pillars” strategy of oil, petrochemicals and industrials. This building strategy is just one of the forces driving up steel prices, which are now more than $1,000 a ton.

 

The Saudis know their 262 billion barrels of oil reserves won't last forever so they are attempting to plant seeds for self-sufficient regional growth that aren't related directly to the oil economy. This means building six brand new cities - out of nothing - as centers of commerce and enterprise.

Four have already been launched: King Abdullah Economic City, Jizan Economic City, Knowledge Economic City and Prince Abdulaziz Bin Mousaed Economic City.

Whether the Saudis can build economic prosperity from nothing is an open question. They certainly have the capital to try. High oil prices have guaranteed that.

Investing in the Middle East's Growth

From an investment perspective, the long-term success of the Saudis' grand economic strategy doesn't matter. The money is going to be spent.

Any sensible investor, seeing such gaudy capital expenditure figures, would do the only sensible thing: follow the money.

It is not just Saudi money, either. And it is not just residential and commercial growth. A lot of it is industrial, petrochemical and power related.

For example, Dubai recently announced plans to build the world's largest aluminium smelter - a $5 billion project with the aim of producing a smelter that can generate 700,000 tons per year. Saudi Arabia has plans for its own $3.8 billion aluminium smelter. Oman has plans for a $2.2 billion smelter.

That's $11 billion for just three projects.

How can you profit from all this? The global building boom is going to require awesome amounts of iron ore and base metals… so producers still have years of gains ahead of them.

Some of our favorites are Rio Tinto PLC ( RTP ), BHP Billiton Ltd. ( BHP ) and Companhia Vale do Rio Doce, now referred to only as Vale ( RIO ).

You can also buy engineering and construction firms. Someone has to receive the contracts to build all of this stuff. Go through the holdings of the PowerShares Dynamic Building & Construction ETF ( PKB ) for some ideas.

Expanding in Our Back Yard

Also remember that the Middle East isn't just spending its money building its own back yard.

In the past year, many governments in the Middle East - notably Abu Dhabi, Dubai and Qatar - have been investing billions overseas in a variety of projects (see chart below) .

These government cash pools - called sovereign wealth funds - invest in ventures as simple as Malaysian real estate to billion-dollar cash injections to struggling banks such as Citigroup Inc. ( C ), UBS AG ( UBS ) and Merrill Lynch & Co. Inc. ( MER ).

Dubbed the “Global Cash Barons” by Money Morning , these sovereign wealth funds currently control $3 trillion. Many experts expect that figure will soar to $12 trillion by 2015 . For perspective, the estimated U.S. gross domestic product (GDP) for 2006 was slightly more than $13 trillion. Some forecasts say that they will control $20 trillion by the middle of the next decade.

The richest sovereign funds include the Abu Dhabi Investment Authority, or AIDA ($875 billion), the Government of Singapore Investment Corp. ($330 billion), and Norway's Government Pension Fund Global, or GPFG ($322 billion), although several others could be even larger.

And with such a fat wallet, foreign governments are watering both their back yard and those of other economically dry countries and industries.
For an in-depth look at sovereign wealth funds, their motives and how to profit from them, check out Money Morning's Investment Report: Three Ways to Profit From Sovereign Wealth Funds - the “Next Wall Street”

The Emergence of the “Cash Barons”

In the past nine months, Middle East and Asia sovereign wealth funds have doled out billions for stakes in major international companies. But the trend has been emerging for the past several years. Just take a look :

SWF / Date

Deal

02/11/08
Abu Dhabi

UBS AG ( UBS ), Europe's largest bank, and Abu Dhabi Investment Co. (ADIC), the United Arab Emirate's state-controlled sovereign wealth fund, say they will start a $500 million joint venture that will invest in infrastructure projects. The fund, which will be launched in the first half of this year, will focus on utility, transportation, energy and society-improvement projects in both the Middle East and North Africa.

Jan.
Kuwait
The $250 billion Kuwait Investment Authority says it is seeking out investment opportunities with capital-starved European banks whose finances have been mauled by mortgage losses, Bloomberg reported . Though Kuwait's SWF has already invested in U.S. banks with a $3 billion investment in Citigroup and a $2 billion investment in Merrill Lynch & Co. ( MER ), it has set its sights on Europe, though noting that “we are interested if we are invited,” a top officials said.
Jan. 15
Dubai
With MGM (MGM) shares now trading down in the $66 range - only months after the stock had posted record highs above the century mark - Dubai World not only re-launched its tender offer, it boosted the number of shares it hoped to buy by 50% to 15 million.
Jan.
China
More than 100 money managers worldwide apply for the chance to invest part of the $200 million controlled by the China Investment Corp. , China's sovereign wealth fund, Bloomberg News reported. The firms had been invited to apply the month before. They will manage CIC assets via stocks on the MSCI All Country Index, MSCI EAFE Index, MSCI Emerging Markets Index and in non-Japanese Asian stocks.
 

12/27/08
Saudi Arabia

Saudi Arabia says it's establishing a sovereign-wealth fund that will eclipse Abu Dhabi's $900 billion venture to become the largest in the world. As the new “King of the Cash Barons” coterie, the state-controlled Saudi investment pool will be positioned as a major rival to other government-run venture funds currently controlled by cash-rich nations in Asia and the Middle East.

Dec. 24
Singapore

Merrill Lynch & Co. Inc. ( MER ), the largest U.S brokerage firm, says it will receive a needed cash infusion of $6.2 billion - with roughly $5 billion coming from Singapore's state-run controlled Temasek Holdings Pte. Ltd . The rest will come from Davis Selected Advisors LP. At the time, Merrill's shares were down 40% year to date. Just weeks before, after Merrill announced an $8 billion write-down and facing the prospect of its worst loss in its 93-year history, CEO E. Stanley “Stan” O'Neal , former chief executive, retired at the board's urging.

Dec.20
Dubai

Dubai World subsidiary Limitless Holdings Pte. agreed to form a joint venture with UEM World Bhd. (PINK: UEMWF ) to build $448 million worth of luxury homes in Malaysia's Johor province - which is to Singapore what New Jersey is to New York City. The housing project will create a new city called Nusajaya on the southwest tip of Johor at Puteri Harbour, a 688-acre waterfront precinct fashioned after the French Riviera.

Dec. 10
Singapore

Faced with a $10 billion write-down and the possibility of its first annual loss in a decade, Swiss banking behemoth UBS AG ( UBS ) says it received an $11.5 billion investment from state-run venture funds in Singapore and the Middle East. UBS had already announced a $3.8 billion write-down. The deal gives the state-run Government of Singapore Investment Corp. Pte. Ltd. ( GIC ) a 9% stake in UBS.

Dec.
Singapore

Renowned Chinese dealmaker Fang Fenglei joins forces with Singapore's government-controlled Temasek Holdings Pte. Ltd . to launch a new $2 billion China-focused private-equity fund.

Nov. 27
Abu Dhabi

Abu Dhabi pours $7.5 billion into ailing Citigroup Inc. ( C ), which recently lost its status as largest bank by market capitalization to Bank of America Corp. ( BAC ).

Nov. 26

Dubai International Capital, a state-owned holding company, acquired an undisclosed stake in Japan's electronics and media juggernaut Sony Corp. ( SNE ).

Nov. 16
Abu Dhabi

Abu Dhabi invested $622 million (an 8.1% stake) in California-based microchip-maker Advanced Micro Devices Inc. ( AMD ).

Nov. 12
Abu Dhabi

MGM Mirage ( MGM ) will partner with the Mubadala Development Co. to develop the $3 billion MGM Grand Abu Dhabi resort. The project will be owned by Mubadala, which is wholly owned by the government of Abu Dhabi, although MGM will earn management fees. The property, aimed at the high-end market, will have “unparalleled views of the city skyline” and “stunning panoramic views of the waterfront,” the companies said in a joint statement.

Oct. 20
Dubai

Dubai International Capital agreed to invest $1.26 billion in the initial public offering of hedge fund Och-Ziff Capital Management Group LLC ( OZM ).

Aug. 22
Dubai

Dubai World, another investment arm of the state, offers to plunk down $5.1 billion for a 9.5% stake in MGM Mirage ( MGM ).

Aug. 14
Dubai

Istithmar, part of Dubai World , was cleared to buy Barneys New York Inc. for $942.3 million from Jones Apparel Group Inc. ( JNY ).

May 21
Saudi Arabia

General Electric ( GE ) sold its plastics division to Saudi Basic Industries Corp. - the country's largest public company, though 70% owned by the government - for $11.6 billion.

May
China

China Investment Corp. purchases 10% stake in Blackstone Group LP ( BX ). China's sovereign wealth fund, the China Investment Corp. (CIC), breaks away from its traditional investment strategies [U.S. Treasury bonds] for the first time and invests $3 billion for 10% stake in The Blackstone Group L.P. ( BX ).

May
Dubai

DIFC Investments , a subsidiary of Dubai International Financial Centre , invested $2 billion in Deutsche Bank AG ( DB ), Germany's largest public bank.

07/06
Singapore

Temasek Holdings , Singapore's state-owned investment company, pays $4 billion for a 12% stake in Standard Chartered Bank. Other Middle East investors subsequently follow suit.

2005
China

China's government-owned CNOOC was blocked in an attempt to buy U.S.-based oil company Unocal on the basis of national security concerns.

Source: Money Morning Research .

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By Martin Hutchinson
Contributing Editor

Money Morning/The Money Map Report

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