Nicholas Vardy

Like a rich kid born into a wealthy family, the Gulf States’ biggest challenges are how not to waste all the money they are pumping out from the ground.

And to their credit, they have acted quite responsibly. The Gulf States have used their oil wealth to build up their sovereign wealth funds to hold close to $2 trillion of assets. The Abu Dhabi Investment Authority alone boasts over $900 billion in assets. Collectively, that’s more than what China dedicates to similar investments.

Qatar’s sovereign wealth fund, in particular, is making its presence felt around the world. In London, Qatar has purchased the department store Harrods; financed One Hyde Park, the world’s most expensive residential development; and was the primary investor in the Shard, Europe’s tallest skyscraper.

Buying Legitimacy in the Eyes of the World

Say the word “Dubai” to Europeans, and often you get the kind of sniffy response that you get when you say “Texas” or “California.” It is all too vast and new and “artificial” — as if bad plumbing in dilapidated London or Paris apartments were a sign of superior culture and breeding.

The Gulf States have worked hard to establish their credibility by becoming a hotspot for international events. Qatar submitted an unsuccessful application for the 2016 Summer Olympic Games. It was later chosen to host the 2022 FIFA World Cup — though as it turns out, not without a great deal of controversy. Dubai is also hosting the World Expo in 2020.

The Gulf States also have focused on building Western-style educational and cultural institutions. Qatar hosts campuses of U.S. universities like Carnegie Mellon, Northwestern, Georgetown and Cornell Medical School. Neighboring Abu Dhabi is home to New York University and the Sorbonne. It even boasts its own version of the Louvre.

Dubai has established itself as an entertainment and shopping destination for Europeans eager to escape dark winters. On my recent travels, I saw that Eastern European discount airline Wizz Air recently set up direct flights between Budapest, Hungary, and Dubai to service the needs of both vacationers and guest workers.

How to Profit From the Boom in the Gulf States

While the political systems in the Gulf States are hardly the loud and vociferous democracies found in the United States and Europe, the Gulf States offer investors both political and economic stability. There was no “Arab Spring” in the Gulf. Both the UAE and Qatar peg their currencies to the U.S. dollar, while Kuwait pegs its currency to a basket of currencies, also heavily weighted towards the greenback. As a result, currencies have remained stable even as many emerging market currencies have tumbled.

The Market Vectors Gulf States Index ETF (MES), also a current recommendation in my Alpha Investor Letter newsletter, tracks the Market Vectors gross domestic product (GDP) GCC Index, which in turn follows the performance of the largest and most liquid companies in the Gulf Cooperation Council.

In case you missed it, I encourage you to read my e-letter column from last week about what market sentiment is telling us now.

Nicholas Vardy

Nicholas Vardy is currently editor of the monthly investment newsletter, The Alpha Investor Letter, which provides longer-term global investments. He also writes two weekly trading services, Triple Digit Trader and Bull Market Alert, which focus on making short-term profits in the hottest markets in the world.