SINGAPORE: Amer Khan says he could sense a stock market rally in late 2012 just from the street scene in Dubai, the financial capital of the United Arab Emirates. Tourists were once again jostling for a spot from which to watch the dancing fountains that adorn the downtown area. Recurring traffic jams, increasing retail sales and a rise in airport passengers were other signals for Khan, the senior executive officer at Dubai-based Shuaa Asset Management.
“The signs in the economy were visible before the market took off,” says Khan, whose firm had 780 million dirhams ($212 million) under management at the end of September. “We waited for the pop and eventually it happened.”
Dubai’s benchmark stock index, in the doldrums for two years, rose 117 percent in 2013, including reinvested dividends, leading the world, Bloomberg Markets magazine will report in its March issue. That helped Khan’s Arab Gateway Fund, which invests throughout the Middle East and North Africa, return 39 percent.
Dubai’s performance was part of a surge by three Gulf states – Qatar, the UAE and Saudi Arabia – which jumped to the top of Bloomberg Markets’ third annual ranking of the most-promising frontier markets in which to invest.
Three Asian nations led the separate emerging-markets ranking, with China No. 1 for the third consecutive year, followed by South Korea and Malaysia.
MSCI Inc., the 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.
The Bloomberg Markets ranking is 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. The gains for the Gulf states came as Brent crude oil prices remained above $100 a barrel for the third year, and the petroleum producers used their huge revenues to diversify their economies.
Qatar and the UAE have progressed to a point that MSCI said on June 11 it would upgrade them from frontier to emerging status in May.
“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’s economy, the largest in the Middle East, expanded at a 5.9 percent average pace during the decade ended on Dec. 31, up from 2.3 percent in the previous 10 years and faster than the global average of 3.8 percent, according to the International Monetary Fund.
Qatar will probably post the quickest growth in 2014 at 5 percent, while Saudi Arabia and the UAE will both expand about 4 percent, according to the IMF.
Frontier markets were a more profitable place to invest in 2013 than emerging markets – a trend that’s likely to continue into 2014, analysts say. The MSCI Frontier Markets Index rose 21 percent in 2013, outpacing the MSCI Emerging Markets Index by 26 percentage points, the widest annual gap since 2005. Corporate earnings in the 26 countries that make up the frontier index have risen to the highest level in five years. Profits in the MSCI emerging index, which is dominated by Brazil, Russia, India and China, are still 11 percent below their 2011 high.
Emerging-market currencies have tumbled in the past week as China’s economy showed new signs of weakness and political turmoil from Thailand to Turkey spurred capital outflows. More than $1.1 trillion of value has been erased from emerging-market equities since the U.S. Federal Reserve signaled in May that it would start scaling back on debt purchases that have boosted demand for high-yielding securities, including developing-nation stocks and bonds.
To some extent, the emerging markets were at the mercy of the Fed decision to taper bond purchases, causing investors to flee riskier markets. Such macro forces had less impact on frontier markets, says Sean Wilson, chief investment officer at New York–based LR Global Partners, which oversees about $200 million in developing-nation investments.
“It’s the local consumption growth, infrastructure spending and reforms, the broadening and deepening financial services sectors that matter to these markets,” he says.
“If you looked at each one of the 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 UAE and Saudi Arabia.
Qatar, which has the world’s third-largest reserves of gas and the highest per capita income, will host the 2022 football 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 over $180 billion in infrastructure projects to be ready to hold this event.”
The tiny Gulf country’s GDP last year was $200 billion, the IMF says.
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 UAE – 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.
The comeback story of the region is 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 in a Nov. 26 report.