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New Gulf fund targets growth in Middle East

is a producer at Business News Network.

Canadian investors looking for some payback from soaring gasoline prices may get their chance this month.

Opportunities to invest directly in the oil-rich Persian Gulf region are normally as dry as the Saudi desert but by late April frontierAlt Capital Corp., a small Toronto-based mutual fund company, expects to launch Canada's first Gulf fund.

With crude prices in the $110 (U.S.) a barrel range, the Gulf region is awash in money and it's flowing like a tidal wave into other sectors of the economy. Double-digit growth has rivalled that of China and over the past year the benchmark MSCI GCC (Gulf co-operation council) index has grown more than 30 per cent to a total market capitalization of more than $1.15-trillion. Over the same period the MSCI World index declined 5 per cent.

Details of the Gulf fund are still being worked out but it will be managed by Toronto-based MAK Allen & Day Capital Partners and will only be available to accredited investors. FrontierAlt chief investment strategist Zaigham Hasan Shah says the biggest challenge for the new venture is to get the Middle East on the radar screens of Canadian investors. "We want to create awareness with the Canadian investor that there is a market where you can get a decent return with relatively low risk" he says.

The Gulf region is the heart of the Organization of Petroleum Exporting Countries and most of the prosperous oil sector is in government and private hands. However, high-growth areas of the economy including the construction, finance and service sectors are increasingly opening up to public equity markets. "Generally people think that the Gulf region is only about oil but lately 50 per cent of the GDP growth is coming from the non-oil sector. So you have a diversification play," Mr. Shah says.

The Gulf region has been able to weather the global equity selloff fairly well. The MSCI GCC Index is holding its gains so far this year while the MSCI World Index is down 10 per cent.

Mr. Shah expects gross domestic product growth in the Gulf to moderate to 6 or 7 per cent in 2008. He says the saving grace for the region is growth projections based on oil prices at roughly $40 a barrel, and the lowest production costs in the world. "As long as oil remains above that level, economic buoyancy will remain. In a global downturn the GCC is one of the safest regions."

Saudi Arabia is the largest member country in the MSCI GCC Index with a weighting of nearly 60 per cent. Financial services - including banks and real estate - is the largest publicly traded sector in the index at just over 50 per cent, followed by materials at 25.7 per cent.

Other member countries include Kuwait (20 per cent), United Arab Emirates (14 per cent), Qatar (5.3 per cent), Oman (1.5 per cent) and Bahrain (0.5 per cent).

Paris-based Cheuvreux - the brokerage arm of Crédit Agricole SA - is a major player in Persian Gulf markets. From its office in Dubai, head of Middle East securities Shezad Janab and economist and strategist Darren Smith say they're confident the region will remain "relatively insulated" from the global slowdown in part because of its decreasing reliance on exports. "The misconception amongst some investors may be that this is still an oil story. We've moved beyond this," Mr. Janab says.

Investing in the Gulf can be risky in large part because regional currencies remain pegged to the floundering U.S. dollar - despite recent attempts by Kuwait to tie its currency to a basket of currencies. The region's reliance on the greenback is a primary concern for Mr. Janab. "We have very few monetary levers we can use in order to stem some of the growth that we're seeing. Inflation is by far the biggest short-, medium- and long-term concern that is afflicting our region" he says.

As a result Cheuvreux is recommending its private clients favour higher beta stocks in the materials and real estate sectors. "When I'm looking for natural hedges to put in place against a high inflation environment the stock market is one - as is real estate."

Cheuvreux expects economic growth to moderate in the region but is counting on infrastructure spending to remain robust. Darren Smith says stock valuations are "reasonably valued" across the broader markets and considers Qatar and the United Arab Emirates the highest-growth geographic areas. "The whole region is a growth story. I can't think of a single sector experiencing negative growth," he says.

One other risk investors must confront in the Persian Gulf is the fact that it is literally surrounded by geo-political hot spots including Iraq, Iran, Israel and Sudan. Cheuvreux refuses to comment on political risk. "It's a politically sensitive environment," Mr. Smith says.

© 2007 The Globe and Mail. All rights reserved.

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