European institutional investors have not flocked to the Middle East in the same fashion as has been seen with China and India, but the region looks set to turn heads in 2008. Indeed, returns of 47 per cent on Saudi Arabian stocks last year, compared to returns of less than 1 per cent in the US, makes the region hard to ignore.

Awash with liquidity, largely due to soaring oil prices, Middle East investment trends and opportunities have undergone major shifts in the last 20 years. Initially, everyone wanted a piece of the hydrocarbons market, but, gradually, European investors have sought to diversify their Middle Eastern assets following attempts by domestic states to open up their economies. Real estate and telecoms are of particular interest.

Stocks that have drawn great interest include Kuwait’s Zain Telecom and Finance House, Saudi Arabia’s Basic Industry Company, and one of the largest real estate firms in the region, Jordan’s EMMAR.

A new era

Today, investment in the Middle East is far more diverse than just oil, and there are indications that further expansion could be on the cards. The Middle East’s capital markets are developing at the same time and countries are now allowing foreigners to invest in sectors that had previously been untouchable.

Umar Ali, managing director and chief executive officer for the Middle East and North Africa at Reykjavik-based Kaupthing Bank, says newly privatised sectors are what European investors should be looking at. Some sectors will remain off limits to foreigners for some time, but the general trend is that more are becoming available.

He says: “The telecoms sector is particularly interesting and has been a great success for investors. The demand for infrastructure services is growing at a strong pace and governments are opening up a number of new areas. The most significant telecoms success has been in Saudi Arabia, where all the major European telecoms, such as BT, showed interest.”

Mr Ali adds that real estate and infrastructure have drawn great interest from European investors. A large portion of this has come from Scandinavia, but mostly from smaller funds and high net worth individuals.

On the whole, Middle Eastern markets appear healthy, perhaps because they lack the one thing that has crippled so many other states during the credit crunch: liquidity.

Hiroo Hagiwara, director of asset management at Kaupthing, points out that, while the Middle Eastern market experienced a major correction in February 2006, the lack of liquidity could now be seen as one of the biggest reasons why the market is currently so stable.

Market correction

Almost immediately following the correction, Middle Eastern governments acted swiftly to allow for increased privatisation and foreign investment. This led to a number of IPOs, which had a double effect on equities. Before the correction, there were far fewer equities available to foreigners, and those that were available had P/E ratios above 50. The influx of new equities and more privatisation has made these stocks much more affordable, and there have even been signs that shareholder activism is on the rise.

Mr Hagiwara says: “The Saudi market was up 47 per cent last year and, overall, governments are trying to liberalise their economies to match western standards and attract interest.

“Geo-political concerns will always be an issue, just like in any emerging market. But I’ve been to all these countries and they are trying hard to open up to foreign investment. I haven’t seen any country trying to close its doors.”

But while Dubai, Bahrain, Qatar and now Saudi Arabia seem to be the more established of the Middle Eastern emerging markets, the new frontier appears to be in the previously inaccessible Libya and Algeria, while other opportunities are arising in Jordan, Lebanon and Syria.

Jean Christophe Ginet, head of real estate at Société Générale Asset Management Alternative Investments, says, although Algeria is far behind Morocco in economic development, the potential for infrastructure products are huge.

“In Algeria, we are at least three to five years away from considering an investment, but it is a huge undeveloped country with a large population, which creates a number of opportunities for infrastructure funds. It is a situation we are monitoring very closely,” he says.

Mr Ali adds: “Jordan is interesting and Lebanon and Syria have all benefited from the oil spill-over effect. These countries are very interested in investing abroad and, for them, it makes sense to invest in neighbouring countries.

“However Libya has attracted significant European interest since the easing of restrictions, particularly in infrastructure.”

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