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Abu Dhabi, UAEFriday 20 April 2018

The best bets for Gulf investors in the next five years: oil states, emerging markets and precious metals

While the UAE offers good prospects, choose your emerging market carefully, says investment expert Peter Cooper, who advocates investing in Budapest

Budapest offers a dynamic economy and promising investment opportunities, says Peter Cooper. Roman Babakin / Alamy Stock Photo
Budapest offers a dynamic economy and promising investment opportunities, says Peter Cooper. Roman Babakin / Alamy Stock Photo

Readers of The National's money pages could be forgiven for being perplexed by a recent survey of major investment houses that concluded the next five to seven years offered the prospect of very low returns on traditional investments like equities and bonds.

It’s not often that these firms are so candid. Usually they paint a more rosy view whatever the investment climate in the hope of getting your money, but this was a statement of morbid realism in the face of unpalatable facts: namely very highly valued global financial markets and rising interest rates.

Ever since the ‘Devil’s Bottom’ of 666 on the S&P 500 in March 2009, asset prices have been gradually rising to price in ultra-low interest rates, and the longer they have continued the higher asset prices have risen.

With markets hitting record highs, a record number of times this year, it is hard to call an exact time for this topping out. But that is what is happening according to a broad consensus of the most believable experts.

So where are people supposed to invest their surplus cash over the next few years? Arabian Gulf residents and nationals are generally in the fortunate position of having this problem to deal with.

Indeed, the prospects for the region do not look bad at all with oil prices still on a recovery path from the nadir of US$25 a barrel over two years ago. Geopolitics currently point to still higher oil prices.

That’s another reason to be fearful about investing in developed economies now. High oil prices often signal a recession. Remember $145 a barrel in July 2008?

However, in more than two decades of living in the Gulf, I have noticed that the business cycle in this part of the world runs in a different phase to the rest of the world. Put simply we do well when oil prices are higher and the developed world tends to catch a cold from higher oil prices.

Hence, I think local investment will make a comeback. Indeed, it already has with a boom in off-plan property sales in Dubai this year.

Tim Howe, a certified public accountant and 20-year Dubai veteran, has just published an interesting demographic analysis of the emirate and its impact on property prices on his blog howesdubai.com.

He notes that Dubai property handovers are running at about 16,000 units per year, while Dubai’s population had risen 14.2 per cent to 2.9 million over the 21 months to the end of September. If that growth rate was to continue to September 2019 then the population would have increased by 480,000 in three years.

Therefore the new supply of residential units is unlikely to keep up with population growth. We saw this in the last recovery from the global financial crisis when a large surplus of property was relatively quickly absorbed in Dubai and prices then rebounded strongly because of a shortage.

Could this pattern be repeated if oil prices stay relatively high and business improves in Dubai? If so it offers the prospect of much better returns from investment in Dubai real estate than buying an ETF tracking the S&P 500.

By extension other investment opportunities in the Gulf oil states ought to do well. UAE stocks are not nearly as highly priced as the major global markets, and valued as emerging market assets with commensurate risk levels. Yet where is the risk really highest?

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Read more from Peter Cooper:

What would a war in North Korea mean for Middle East investors?

The best contrarian investment opportunities this Autumn

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Emerging markets in general have been pretty popular this year in the global investment community. That might make some investors leery of chasing up prices further.

However, you might be wise to be choosier about which emerging market to invest in. I’ve spent the last three summers in Budapest and can report first-hand about how this dynamic economy is coming to life and offering promising investment opportunities.

Hungary has the lowest unemployment in Europe, an economic growth rate of 3.2 per cent - twice the European Union average, and salary growth running at 13 per cent. Budapest apartment rents are rising at 10 per cent per year and prices by up to 20 per cent; construction activity is up 37 per cent year-on-year.

Some UAE investors have been quick to act. Dubai billionaire Khalaf Al Habtoor has two hotels, the Ritz-Carlton and InterContinental and recently bought two office complexes in Budapest.

There are major renovation projects happening all over the city. The most impressive is the Parisi Udvar, a huge building clad in more than 100,000 ceramic tiles and once the most valuable in the city when it opened in 1906. It is owned by two Jordanian entrepreneurs, Zuhair Awad and Sameer Hamdan, who made their fortune in this city.

The Parisi Udvar will re-open as a Hyatt hotel next year. There is also a ‘W’ hotel scheduled to open in 2020 opposite the Budapest Opera House, also with Middle Eastern owners.

For expatriates and nationals residential property in Budapest is an attractive buy with large classical apartments still selling for a tiny fraction of the price they would command in London, Paris or Vienna. I came across one Dubai national selling his apartment when I was looking for an apartment myself this summer.

If I can’t tempt you with investments in the oil states or emerging Central Europe then precious metals are probably the best passive investment option should the major equity and bond markets prove poor performers over the next five to seven years.

The last time we saw this sort of market was in the late 1970s, a pretty dismal decade for the global economy with sky-high oil prices and collapsing stock and bond markets. Then gold and silver enjoyed their last great bull market with 10 and 25-fold price rises respectively.

So far this year it has been bitcoin and the cryptocurrencies that have shown this sort of stellar performance, and they probably have taken some of the speculative cash flow that would normally have gone into precious metals.

But last week, the Saudi billionaire Prince Alwaleed bin Talal was the latest investor to warn about digital currencies being Ponzi schemes and when the inevitable collapse comes then precious metals should get a positive boost.

Peter Cooper has been writing about finance in the Gulf for more than 20 years