The changes sweeping the Gulf provide opportunities for investors

Matthew Partridge talks to Nicholas Wilson of the Gulf Investment Fund about the rapidly changing face of the Gulf states, and the opportunities for investors.

180910-gulf

Crown Prince Mohammed bin Salman has ambitious plans for the Saudi Arabian economy.

2016 Anadolu Agency

When you think about the economies of the countries in the Persian Gulf, you almost automatically think of oil and energy. However, over the past few years the rulers of these various countries have made several attempts to diversify their economies (or at least to appear to). But experts are sceptical about whether these countries are serious about reform.

One person who thinks that they are serious and that the changes present a great opportunity for investors is Nicholas Wilson, the chairman of the Gulf Investment Fund (GIF), an investment trust listed on the London Stock Exchange.

The Gulf Investment Fund was originally set up in 2007 to focus solely on Qatar. However, Wilson grew frustrated about the relatively few opportunities available, as there were only 43 listed companies in Qatar, with just half of them realistically investible.

Two years ago, the fund decided to broaden its mandate to include Saudi Arabia, the UAE, Kuwait, Bahrain and Oman. These six countries have a total of 694 listed companies, of which 170 are investible.

Serious about reform

The region's governments are finally getting serious about economic reform and diversification. One of the reasons Wilson decided to change the fund's mandate was Vision 2030, Saudi crown prince Mohammed bin Salman's ambitious plans for the Saudi economy.

"Every country in the world has its own plans for the future", says Wilson, but Saudi Arabia's plans to diversify their economy by creating several new cities could be a game changer. The most ambitious of these projects is Neom, a $500bn city 16 times the size of Greater London, where Saudi Arabian social laws would not apply.

Of course, Saudi leaders have made similar noises about diversification in the past, only for them to remain unfulfilled, and Wilson admits that "not all of the planned cities and projects will necessarily be completed".

A fall in the oil price back to the levels it was only two years ago (when it was below $40/barrel) could make Riyadh's plans impossible to carry out. However, Wilson thinks that this is very unlikely as OPEC and Russia seem to have worked out an arrangement to keep prices at the higher end of the $60-80 range.

Investment will only increase

However, the pace of change in the region is much faster than anywhere else. While, in the UK, not a single mile of track has been laid on the flagship High Speed 2 rail project nearly a decade after it was announced, Qatar has nearly finished a metro system roughly half the size of the London Underground after only four years of work. It has also reduced energy contribution from 90% of its economy two decades ago to less than half. Even if Qatar were to lose the 2020 World Cup, there are unlikely to be any ill effects, says Wilson.

"Outside China, there is nowhere on earth where such large sums of money are being spent on infrastructure in such a short space of time" says Wilson. Demographics are also favourable: countries in the region have a young and highly educated population. There has been a shift in attitudes to employment, with the younger generation more eager to work in the private sector, or even set up their own business.

This in turn should make it easier for the Gulf states to reduce the unsustainable level of public spending, freeing up more funds for infrastructure, and providing a cushion should oil prices fall.

While the combination of strong growth and reasonable valuations mean that the entire market should do well, there are three sectors that should particularly benefit: banking, petrochemicals and healthcare. The banking sector has shored up its capital position since the crash of 2008-09 and is now growing at a strong rate.

The petrochemical industry has been one of the few industrial success stories, benefiting from ready access to cheap energy. And demand for healthcare is set to increase markedly, "as people in the region now demand the best treatments and can afford to pay for them".

The risks are real, but the rewards are too

Of course, there are "both external and internal" political risks associated with investing in the Gulf. But Wilson thinks that they are overdone. While relations between Saudi Arabia and Qatar are at an all time low, international pressure last year prevented the dispute escalating into an open conflict, and the economic impact on both countries has been kept to a minimum.

And the dispute between Canada and Saudi Arabia, where Saudi Arabia ordered its citizens to return home after the Canadian government criticised Riyadh's treatment of human rights activists, is just a "Twitter war", rather than a sign of the government pulling back from reforms.

Despite the fact that the region is opening up to foreign investment, it is still very hard for the retail investor to directly invest in individual shares. For example, Saudi Arabia restricts direct investment to "qualified foreign institutions". This makes funds like GIF one of the few ways to gain access to this market.

In order to reassure investors further, GIF is offering investors the opportunity to redeem their shares at a price equal to the net asset value (NAV) in 2020. As it currently trades at a discount to NAV of about 14.8%, this could give investors a big return on their investment.

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