Editor’s Note: Middle Eastern countries know their oil supplies aren’t going to last forever. So they’re pumping more than $2 trillion into new, long-term economic projects – such as brand new cities that will function as both business and vacation hot spots. A special report jointly developed by U.K. affiliate MoneyWeek Magazine and our experts here at Money Morning explores the next moves by these economic heavyweights, their spend-happy sovereign wealth funds and how investors can profit from them.

In 2007, the six nations of the Gulf Cooperation Council – Saudi Arabia, Kuwait, Bahrain, Omar, Qatar and the United Arab Emirates – earned $381 billion from oil exports.

And that was back when the average annual price for oil was at a cozy price of under $65 a barrel, compared to our current levels of $138 a barrel.

The cumulative earnings will reach into the trillions if oil remains over $100 for several years. The region literally has more money than it knows what to do with, but that won’t last long because oil supplies won’t last forever.

That means a lot of that money is flowing into infrastructure.

From Dubai to Kuwait, there’s an estimated $2.4 trillion in construction projects either underway or under development in the world’s biggest oil patch.

Surprisingly, $1.4 trillion of that is earmarked for projects in civil construction. This means spending on residential and commercial construction projects in the Middle East outweighs construction on oil, gas, power, petrochemical, industrial and water projects combined.

Some of these gargantuan civilian projects include:

• King Abdullah Economic City, Saudi Arabia: $120 billion. The leading firm is Dubai-based developer Emaar.
• Silk City Project, Kuwait: $86 billion. The leading firm is Tamdeen Real Estate.
• Dubailand, U.A.E.: $60 billion. The leading firm is Tatweer.
• Al-Zorah, a $60 billion coastal city in the emirate of Ajman. The leading firm is Solidere International.

The Saudi Arabian government wants to diversify the Saudi economy away from its current “Three Pillars” strategy of oil, petrochemicals and industrials. This building strategy is just one of the forces driving up steel prices, which are now more than $1,000 a ton.

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The Saudis know their 262 billion barrels of oil reserves won’t last forever so they are attempting to plant seeds for self-sufficient regional growth that aren’t related directly to the oil economy. This means building six brand new cities – out of nothing – as centers of commerce and enterprise.

Four have already been launched: King Abdullah Economic City, Jizan Economic City, Knowledge Economic City and Prince Abdulaziz Bin Mousaed Economic City.

Whether the Saudis can build economic prosperity from nothing is an open question. They certainly have the capital to try. High oil prices have guaranteed that.

Investing in the Middle East’s Growth

From an investment perspective, the long-term success of the Saudis’ grand economic strategy doesn’t matter. The money is going to be spent.

Any sensible investor, seeing such gaudy capital expenditure figures, would do the only sensible thing: follow the money.

It is not just Saudi money, either. And it is not just residential and commercial growth. A lot of it is industrial, petrochemical and power related.

For example, Dubai recently announced plans to build the world’s largest aluminium smelter – a $5 billion project with the aim of producing a smelter that can generate 700,000 tons per year. Saudi Arabia has plans for its own $3.8 billion aluminium smelter. Oman has plans for a $2.2 billion smelter.

That’s $11 billion for just three projects.

How can you profit from all this? The global building boom is going to require awesome amounts of iron ore and base metals… so producers still have years of gains ahead of them.

Some of our favorites are Rio Tinto PLC (RTP), BHP Billiton Ltd. (BHP) and Companhia Vale do Rio Doce, now referred to only as Vale (RIO).

You can also buy engineering and construction firms. Someone has to receive the contracts to build all of this stuff. Go through the holdings of the PowerShares Dynamic Building & Construction ETF (PKB) for some ideas.

Expanding in Our Back Yard

Also remember that the Middle East isn’t just spending its money building its own back yard.

In the past year, many governments in the Middle East – notably Abu Dhabi, Dubai and Qatar – have been investing billions overseas in a variety of projects (see chart below).

These government cash pools – called sovereign wealth funds – invest in ventures as simple as Malaysian real estate to billion-dollar cash injections to struggling banks such as Citigroup Inc. (C), UBS AG (UBS) and Merrill Lynch & Co. Inc. (MER).

Dubbed the “Global Cash Barons” by Money Morning, these sovereign wealth funds currently control $3 trillion. Many experts expect that figure will soar to $12 trillion by 2015. For perspective, the estimated U.S. gross domestic product (GDP) for 2006 was slightly more than $13 trillion. Some forecasts say that they will control $20 trillion by the middle of the next decade.

The richest sovereign funds include the Abu Dhabi Investment Authority, or AIDA ($875 billion), the Government of Singapore Investment Corp. ($330 billion), and Norway’s Government Pension Fund Global, or GPFG ($322 billion), although several others could be even larger.

And with such a fat wallet, foreign governments are watering both their back yard and those of other economically dry countries and industries.
For an in-depth look at sovereign wealth funds, their motives and how to profit from them, check out Money Morning’s Investment Report: Three Ways to Profit From Sovereign Wealth Funds – the “Next Wall Street”

The Emergence of the “Cash Barons”

Source: Money Morning Research.
News and Related Story Links:

• MoneyWeek Magazine:
  Home Page

• Money Morning:
  Dubai World Opens Wallet to Help Build Malaysian Super City

• Money Morning:
  Fang-Temasek Partnership the Latest in a String of High-Profile Sovereign Wealth Deals

• Money Morning:
  Three Ways to Profit From Sovereign Wealth Funds – the “Next Wall Street”

Several Middle East markets are expected to launch exchange-traded funds (ETFs) this year, according to a senior official at Morgan Stanley (MS), opening the door to the region’s very lucrative, fast-growing economies.

"Most exchanges in the region would like ETFs, even Saudi Arabia. The region sees ETFs as an appealing product for the [Gulf Cooperation Council] investor as well as other investors in the region," Deborah Fuhr, Morgan Stanley’s managing director of investment strategies, told the United Arab Emirates’ Khaleej Times.

Fuhr said exchanges in Oman, Saudi Arabia and Egypt are likely to be the first to offer ETFs. There is also interest from the Dubai International Financial Exchange (DIFX) and the Abu Dhabi Securities Market (ADSM), she said.

The simplicity of ETFs – which are index-tracking funds that can be bought and sold like stocks – are an ideal method for tapping the economies of overseas markets. Many times, the ETFs represent an individual country’s main index or a basket of related stocks, such as agriculture or commodities.

The first ETF launched in 1993 and since then their popularity has only grown. There are currently 1,173 ETFs listed on exchanges in the United States, Latin America, Europe, Asia, Australia and South Africa, according to Business 24/7. 

Tapping Oil-backed Economies

Once the Middle East region does offer ETFs, there’s little doubt a barrage of institutions, sovereign wealth funds and individual investors will flock to them.

Not only are the funds attractive because Middle East exchanges are soaring right now, but also because many of these economies are built and sustained by the region’s oil wealth. And they’ll fare even better in the future, as oil is expected to peak as high as $187 this year.

That’s certainly the case for Saudi Arabia, but the real gem of this group is the UAE, where sovereign wealth funds are slowly releasing highly valued holdings onto local indices.

Last November, Dubai Ports World, a state-run holding company, set a regional record for the biggest initial public offering (IPO) by raising $5 billion. Its success will no doubt prompt other UAE governments to launch more public share sales.

The boom in Middle East investors looking to sink their petro-dollars into more long-term investments has made many Western investors envious of these opportunities, especially as the U.S. economy closes in on a possible recession.

News and Related Story Links:

• Wikipedia:
  Gulf Cooperation Council

• Kahleej Times Online:
  ETFs likely to be listed in the Middle East this year
  

• Wikipedia:
  Exchange Traded Fund

• Business 24/7:
  ETFs to debut in Mideast ‘this year’

• Money Morning:
  Outlook 2008: How to Profit When Oil Bubbles Up Above the $100 Level

• Money Morning:
  Dubai Ports World’s Record IPO

• Gulf News:
  DP World’s offering could trigger more IPOs

On Jan. 1, six Gulf states joined together – Saudi Arabia, Qatar, Bahrain, Oman, the United Arab Emirates (UAE) and Kuwait – to form a single common market, not unlike the European Union (EU), which has served as its model. The common market, valued at $715 billion, is the first step toward common banking, common exchanges, and even increased ties between the nations.

But will it increase international investment in the region?

We think so. But for it to really work, there’s going to have to be a single currency at the end of the day.

I’ve been following this story for years and, in fact, first suggested that a shared currency would play an important role in opening the Middle East region to U.S. investors. At the time, many people thought my remarks were among the craziest things they’d ever heard.

But as the old adage goes, reality is often stranger than fiction.

It turns out that many prominent Middle East investors have quietly advocated just such an approach for years. Now it appears as if it will become a reality.

With regard to timing, there is still some debate. Some, including prominent proponent Abdul Rahman ibn Hamad al-Attiyah [who serves as the Secretary General of the Riyadh-based Gulf Cooperation Council (GCC)] believe a common currency could be possible in as little as two years from now – in 2010. Others think 2013 is much more realistic, since Oman, in particular, appears to be having problems ahead of the transition. But the Oman government has firmly stated that it will make the transition eventually.

So this is a question of "when," rather than "if."

What’s in it for the region?

Everything. Most of the regional currency is presently pegged to the U.S. dollar. This means that, as the dollar has lost value, so has the region’s clout. On the heels of inflationary pressures against the dollar, the region’s central banks are struggling to contain their own economies, particularly when it comes to regional inflation, which is a big worry right now.

And that’s really what’s driving much of this. Under normal conditions, Middle Eastern central bankers would be raising rates to stave off inflationary pressures. But, thanks to the Ben S. Bernanke-led U.S. central bank turbo charging its greenback printing presses, that’s not an option. Instead, Middle Eastern banks have had to reluctantly follow along by lowering rates almost in lockstep with U.S. Federal Reserve policymakers – simply to mitigate the risks they face as they relate to the dollar.

In other words, as long as the Arab states’ currencies are pegged to the dollar – and as long as those states cannot float their own currencies – the region remains highly dependent on how our Fed handles itself in the current financial crisis. And, lately, that’s not something the central bank has done very well.

As a result, many Middle East business leaders and investors want a united, floating currency that’s independent of the international community in general – and the United States in particular. Not only do those Middle East insiders believe that it would remove risks associated with the dollar, they also think that it would facilitate cross-border cooperation in the region, which has arguably been one of the biggest benefits the EU has reaped from its own integration.

And that brings us full circle with regard to our money.

An integrated currency will facilitate international investment in the region on a scale that’s never been seen before. Couple that prospective development with the financial-market consolidations already under way worldwide [and Middle Eastern involvement in that process] and you have the potential for some very impressive growth – if for no other reason than it would help solidify a newly established currency.

The so-called "Global Titans" that we follow are logical beneficiaries, particularly when you consider that the Middle East is poised for high single-digit economic growth for the foreseeable future. And when you also consider the fact that the region is literally flooded with liquidity – thanks to record high oil prices at a time when American and European markets are staggering – and you have the potential for some real winners in the next few years.

We’re actively looking at several investment choices right now and will tell you about them as the region’s currency consolidates in what we expect to be short order.

News and Related Story Links:

• AFP:
  Gulf states launch GCC common market

• Wikipedia:
  Cooperation Council for the Arab States of the Gulf