Investors are looking towards the Middle East and North Africa.
When journalists write about prospects for the Middle East, they usually aren't talking about investments. But the region isn't all strife and sectarianism, markets in Turkey, the United Arab Emirates, Egypt and Saudi Arabia have all flown in recent years, so is it time for investors to head east?
New frontiers
Frontier markets in the Middle East and Africa have had a remarkable 12 months. Turkey is up 143%, trouncing every country in the world except Indonesia (172%) and Hungary (204%), according to the MSCI Index.
Egypt is up 93%, Saudi Arabia is up 74% and the United Arab Emirates is up 51%. Taken as a whole, the MSCI Gulf Cooperation Council (GCC) countries, which cover Saudi Arabia, the UAE, Kuwait, Qatar, Bahrain and Oman, have delivered 56%.
It is an impressive showing.
I've been thinking about the Middle East after reading that fund manager Barring Asset Management is looking to exploit the region's potential with its new Baring MENA fund. MENA stands for Middle East and North Africa, and Barings believed the region's young and growing population, resource-rich land and commitment to developing world-class infrastructure makes it one of the best investment opportunities in the world.
Yes, it is politically volatile, but that has also kept equity valuations affordable.
Financials: it's where the money is
The fund is heavily weighted to financials, the biggest in the sector in the region, and fund manager Dr Ghadir Abu Leil-Cooper sees significant potential in mortgage and insurance products, as well as Islamic and investment banking.
She insists the investment rationale for investing in the region is strong. "Growth rates are likely to increase significantly over the coming years, driven by consumption, infrastructure spend and the recovery in oil and gas prices. Furthermore, equity markets are in the early stages of development, only recently opening to foreign ownership, which provides exciting new opportunities for investors."
This is certainly an opportunity to diversify your portfolio, since I doubt many Fools are directly investing in the region.
East and South
Barings isn't the only fund manager investing in the region. Guernsey-domiciled Investec Africa & Middle East launched in April 2008, and returned 87% over the past 12 months, outstripping its benchmark MENA equity index. It has a much wider geographical spread, investing across the entire African continent, including South Africa. That's 25 countries in total.
Some funds have gone even further, covering eastern Europe, Middle East and Africa, such as the Luxembourg-based Fidelity Emerging Europe Middle East & Africa, which is up 99% over the past 12 months.
Direct equity plays
If you don't like paying fund charges, plenty of UK-listed companies have exposure to the Middle East and Africa, including financial services companies Barclays (LSE: BARC), Old Mutual (LSE: OML) and Investec (LSE: INVP), and other big names such as British American Tobacco (LSE: BATS), SABMiller (LSE: SAB), Petrofac (LSE: PFC) and Hikma Pharma (LSE: HIK), as we pointed out recently in Plays on Emerging Markets: Africa & Middle East.
The UAE is the UK's 14th largest export market, worth around £3.7 billion a year, with 88% of our exports there going to Dubai. Saudi Arabia comes next, our 23rd largest export market, worth £2.3 billion in 2008. The region is heavily dependent on imports, and offer promising opportunities for UK exporters in industries such as oil and gas, construction, and financial services.
Kings of the wild frontier
Frontier lands are like a riddle wrapped in an enigma, an emerging region with emerging markets. As you would expect, they are high growth and high risk. Markets are still less developed and inefficient, but that could work in your favour. Doing business in the region, particularly in Africa, isn't easy, but companies that get it right can enjoy high margins and rapidly-growing revenues.
The region is rich in natural resources, boasting 80% of the world's proven oil reserves and many other commodities, and could therefore be seen as a geared play on China and India. This is a two-way relationship, with Middle Eastern and African countries using cheap Chinese goods to boost their own efficiency and productivity.
The region is also seeing a youthful democratic bulge, notably in Egypt, the largest market in the Arab world, where young people aged between 10-24 make-up almost one-third of the population (despite government attempts to reduce the birth rate). This is helping to drive retail sales, which are expected to grow from $63 billion in 2008 to $120 billion by 2013, according to the Egypt Retail Report. Rapid urbanisation -- Cairo's population is 15 million -- is boosting spending in both the retail sector and new infrastructure. Plus of course there is tourism.
Egypt, together with the UAE, Saudi Arabia and South Africa, account for nearly 80% of retail sales in the Middle East and Africa.
To boldly go
Of course there are dangers. The region's youth bulge is fuelling a religious revival, notably in Egypt. The Saudi Arabian economy is still 75% oil-based, despite attempts to introduce economic reform and market liberalisation. Iraq remains unstable, and we still don't know how the Dubai crisis will play out.
Anybody setting foot in this region has to tread carefully, and expect volatility. But if you are looking to pioneer new investment territory, this could be the final investment frontier.
More from Harvey Jones:
