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Gulf Countries Emerging Markets

By now it is known that the seven largest emerging market economies (the E7) have been emerging and monopolising the economies. However, it is noticeable that the Gulf countries are rising quicly becoming the new emerging frontier markets. Gulf countries such as Qatar, the U.A.E. and Saudi Arabia are clearly high ranked as the most-promising frontier and emerging markets in which to invest in.


The Bloomberg's emerging and frontier markets rankings are based on 19 measures of the investing climate, from forecasts of gross domestic product growth for the next two years to the ease of doing business.

MSCI Inc., a New York–based publisher of equity indexes, designates countries as emerging or frontier based on a variety of criteria, including trading volumes, restrictions on foreign investors, corporate governance, and currency and political stability.

South Korea tops Bloomberg Markets' fourth annual ranking of the most-promising emerging nations in which to invest in 2015, with Qatar No. 2, China No. 3 and the United Arab Emirates No. 4. Saudi Arabia heads the list of the most-promising frontier markets.

Qatar and the U.A.E. have progressed to a point that according to MSCI it would upgrade them from frontier to emerging status.

“In these countries, you see a burst of construction, which is reminiscent of what you saw in China in the 2000s, when they came up with the high-speed bullet trains, the airports and all the new infrastructure -- which opened up the interior of the country,” says Arjuna Mahendran, chief investment officer at the wealth management division of Dubai-based bank Emirates NBD PJSC.

Saudi Arabia is classified as frontier because it limits direct investment in its markets to the six members of the Gulf Cooperation Council, or GCC. Others can invest only via swaps or ETFs.

Riyadh announced it would remove those restrictions. That will set the conditions for it to be designated an emerging market as early as 2017 according to Sebastien Lieblich, head of MSCI Index Research.

Frontier markets are more profitable place to invest than emerging markets -- a trend that’s likely to continue into 2014-2015, analysts say.

Construction Boom

Looking at each one of the these countries, there’s some domestic infrastructure plays that are propelling the economy. It was the construction and retail sectors -- not the state-owned oil and gas industries -- that led the big market gains in Qatar, the U.A.E. and Saudi Arabia.

Qatar, which has the world’s third-largest reserves of gas and the highest per capita income, will host the 2022 soccer World Cup.

“This is the largest sports event in the world,” says Rami Sidani, a money manager at Schroder Investment Management Ltd. in Dubai. “And Qatar is going to be spending more than $180 billion in infrastructure projects to be ready to hold this event.” The tiny Gulf country’s GDP last year was $200 billion.

‘Real Prize’

In Saudi Arabia, “strong oil prices have allowed the government to spend billions each year on infrastructure, housing, schools and hospitals,” says Brent Clayton, an LR Global emerging-markets money manager. “While Saudi Arabia is known for its oil, it is the nonoil sectors of the economy -- companies tied to consumption growth and construction spending - - that represent the real prize to investors.”

Only investors within the Gulf Cooperation Council -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the U.A.E. -- can invest directly in Saudi Arabia, where the benchmark stock index rose 26 percent in 2013. Outsiders access the market through mutual funds and derivatives sold by investment banks.

Dubai Tourism

The comeback story of the region is the emirate of Dubai, which at the height of the financial crisis was on the verge of default. It has been a key beneficiary of the unrest elsewhere in the Middle East, says Tim Drinkall, a New York–based money manager at Morgan Stanley Investment Management.

“Your traditional tourist destinations have been places like Beirut, Lebanon, and all of Egypt,” he says. “All those destinations essentially have been closed down. You are finding a tourism pickup in Dubai.”

The emirate also won the right to sponsor World Expo 2020, an event held every five years that is a stage for nations to show off their economic progress.

“This confirms Dubai’s position as the financial gateway, the trading hub, the link between the East and the West,” Schroder’s Sidani says. The Dubai economy will grow an average of 6.4 percent a year over the next three years, Barclays Plc said.


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