Monday, December 3, 2007
Dan's statement sounded preposterous.
"Graham, if you're looking to get your money away from the U.S., you can't do better than the Middle East."
I first met Dan Smaller in Dubai last May. He's spent the last 25 years focusing strictly on emerging markets all over world for big institutional investors. He's taken investors everywhere from Pakistan to Peru. And he was the first guy to take Wall Street to the Middle East. But the Middle East as a safe haven?
Dan went on: "The markets here are uncorrelated to the U.S. markets entirely. In fact, most Middle Eastern markets actually rose during August, when the Dow was an absolute roller coaster."
That's all fine and good Dan, but if oil drops those places are in trouble, aren't they?
Dan laughed, "I hear that all the time. The answer is a resounding 'No!' First of all, you need to understand that the Middle East is not just one market. It's 13 markets spread out over a space that takes eight hours to fly over. And not all these places are driven by oil."
Dan's exactly right about people's misconceptions of the Middle East. After returning from Dubai earlier this year, I was astounded by how many people said to me, "Well, once oil drops Dubai is doomed." In reality oil only accounts for 3% of Dubai's GDP. And it's going to be completely oil dry in the next two decades.
Dan continued, "Every market is different. In Morocco, the most important factor for economic growth is rain. In Egypt it's tourism. In Dubai, it's the nightlife. And these economies are bigger than you might think. Taken as a whole, the Middle East is the eighth biggest economy in the world. On a per capita basis, Qatar, the United Arab Emirates, Kuwait, Oman, Bahrain, and others are richer than Russia, Brazil, and just about any other emerging market you can name."
We've written about the incredible projects planned in the Middle East on these pages before. I've had lunch in the Burj Al Arab (Dubai's famous sail-shaped hotel) and witnessed the construction of the famous Palms and Globe (manmade islands shaped like a giant palm tree and a world map, respectively) and other surreal projects in Dubai. But what Dan told me next completely blew me away...
"The Middle East currently has more infrastructure projects planned than China and India combined. Saudi Arabia alone is planning 13 cities, not towns, but full cities the size of Dubai. And all of these projects are budgeted at $40 oil. Oil would need to fall more than 50% for these projects to be uneconomical."
I realize the idea of investing in the Middle East sounds crazy to most U.S. investors... which is one of the reasons I think it's attractive. You never make outrageous returns buying what everybody loves.
You can't invest directly in most of these markets unless you're a citizen of the Gulf Cooperation Council. So most U.S. investors are out of luck. However, there are a few funds to get your money into these markets, which should interest global investors.
One is the Global Investment House fund I wrote about earlier this year. Another is through Dan's firm, Algebra Capital. Algebra launched its Special Situation Fund in July, and it's already up 56%. Over the same period, the U.S. markets are all down.
If you're looking to get some of your money away from the U.S. markets, the Middle East is an attractive place – even if oil prices decline. Turn off your TV, leave your stereotypes at the door, and you may end up making a fortune.
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