The Investment case for the Gulf states

This report is not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Past performance is no guarantee of future results.

Petrodollars spurring reform, Growth

The case for investing in Gulf States equities relies heavily on the region's rich oil reserves and on the sustained strength of oil prices. Many Gulf nations are flush with oil export capital, which is beginning to engender future, non-oil related industries. While no one can predict future trends in the price of oil, there are fundamentals supporting continued growth in the region over the near and long term.

The Persian Gulf and its coastal areas are the world's largest single source of crude oil. The

region possesses 40% of the world's total proven oil reserves and 22% of the world's proven gas reserves.1 Qatar possesses the world's third largest gas reserves, after Russia and Iran, and is the largest exporter globally¹.

Due primarily to global demand for oil and the relative increase in the region's wealth, the Gulf States of Saudi Arabia, Kuwait, Oman, Qatar, Bahrain and the United Arab Emirates have grown at a 7% annual growth rate since 2002 and boast a per-capita income (of $19,000) that is three times that of China².

Further supporting growth for the GCC nations is the cumulative surplus of approximately US$739 billion built over the last five years¹, which affords the region ample financial resources for capital projects and other various investments. Governments in the region have improved management of their wealth and have commenced reform of their economies by attempting to diversify their reliance on oil capital.

While the Gulf States still largely place limits on foreign stock ownership, direct foreign investment in the region is on the rise. Private equity funds investing in the Middle East and North Africa grew to US$5.2 billion in 2006 from US$316 million in 2004³.

Notably, the region has made strides in trying to build regional financial hubs; both Qatar and Dubai have linked to Western exchanges in an effort to become dominant financial centers.and potentially to further open their financial sectors to international capital.

a "mega Project" current

The immense wealth created by crude exports has begun to carry over into the expansion of the Gulf's infrastructure. Countries throughout the region are pushing toward modernization and industrialization. Over US$1.6 trillion in the region is earmarked for "mega-projects" and infrastructure spending; the

IMF is forecasting that US$800 billion will be spent in the next five years, with more than 75% in nonhydrocarbon sector alone.1 Dubai, in particular, has been a trendsetter in reforms and infrastructure spending, including the development of real estate and tourism. Qatar, another good example, is expected to grow at double digit rates through 20097, thanks to its heavy infrastructure investments. Such projects, in turn, are driving earnings forward for construction, real estate and financial firms and are helping to push personal incomes higher.

A key ingredient to the future success of the region lies in its ability to develop a forwardlooking approach. Governments across the region have made political commitments toward longterm economic diversification programs focusing on particular services such as trade, tourism and transportation. Civil infrastructure, such as water, power, education and healthcare, are also targeted areas expected to present private sector investment opportunities.

a modern Generation

The population explosion is yet another trend supporting local businesses and attracting the attention of foreign investors. A young demographic base (64% of the population is under 30) is responding to global urbanization trends and is increasing spending on cell phones, appliances, and other luxury goods. Due to the burgeoning of capital projects, there has been rapid growth in the region's labor force and an influx in the expatriate population.

The World Bank projects population growth for GCC countries of 2.4% per year between 2005-2010 and a 2.0% growth from 2010-2020¹. While rapid population increases in unstable regions of the world can potentially have serious political, economic and health implications, demographic momentum in the Middle East may remain a powerful catalyst for future growth in the region.

obstacles remain

While there are myriad factors supporting continued growth in the Gulf, the region is not without its pitfalls. Softening oil prices would likely lead to a slowdown in nominal GDP growth and negatively impact investor sentiment. Further, the Gulf region is not completely immune from a U.S. slowdown, particularly through the impact of falling energy prices and a falling dollar, to which most Gulf currencies are currently pegged. In addition, rising material costs could threaten real estate projects

as well as negatively impact hydrocarbon output growth. Mounting inflation rates in GCC nations, in extreme cases reaching double digits, also present potential speed bumps for continued growth. In addition, political and social instability in surrounding regions may contribute to volatility as continued controversy and diplomatic ensions rise in regards to the nuclear program of neighboring Iran.

Pioneering Global markets

For investors willing to take a long perspective on a higher risk market, investing in the Gulf States may be very attractive. The Gulf remains relatively under penetrated in terms of investment opportunity and the potential exists for strides on economic fronts. In addition, a relatively low correlation to markets of more developed conomies may make an investment in the Gulf States an attractive diversifi- cation tool.

• Economic growth potential
• Increasing opportunity for capital investment
• Low correlation to developed markets
• Complement to existing emerging markets exposure

Sources

1. Merrill Lynch, Bargains in the Bazaar-Remain Bullish for 2008, February 7, 2008
2. McClatchy Washington Bureau, Mideast's Own Oil Consumption Helping to Drive Prices Up, April 17, 2008
3. The New York Times, The Mideast Money Flows, September 27, 2007
4. The Economist, Briefing: Gulf Economies, How to Spend it, April 26, 2008
5. IMF, Regional Economic Outlook, Middle East and Central Asia, May 2008
6. Citi, The MENA Primer: Key Facts of the Equity Markets of the Middle East and North Africa, September 27, 2007
7. Arab News, Qatar: Fastest Growing Economy in GCC, March 11, 2008

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