Page 241 - Aamir Rehman - Dubai & Co Global Strategies for Doing Business in the Gulf States-McGraw-Hill (2007)

Capable Capital: The GCC as a Source of Capital 223

Pakistan while Dubai Islamic Bank has opened many branches
there. Local investors and corporations view emerging markets as
an opportunity for growth, diversification, and access to customer
pools far larger than domestic GCC markets will afford. While these
markets bear additional risk, the potential for reward is enough to
warrant a sizable (though still small minority) portion of investors’
total portfolio.
GCC markets have seen a significantly greater allocation of
capital—especially by private investors—during the boom of the
2000s than during the previous booms. One reason for this is the
abundance of attractive investment opportunities, especially in
population-linked sectors. The Gulf states now have almost 40 mil-
lion people, compared with just 10 million in 1975. The real estate
market, which most sophisticated observers now see as overheated,
has offered phenomenal returns in recent years. Many buyers—
especially in red-hot Dubai—purchase properties during the con-
cept phase of development, based on nothing but a floor plan and a
promise, and then sell the property for a handsome return before it
is even built. Local stock markets also enjoyed phenomenal growth
before experiencing a sharp market correction in 2006. Institutional
investors, many of whom tread carefully to avoid “bubble” sectors
like listed equities, have found solid opportunities in infrastructure
investment and large-scale projects in sectors such as energy that
promise strong fundamental growth. The flow of capital and high
rates of return are mutually reinforcing: more capital raises asset
values and creates high returns, which in turn attract additional
capital and investors. This cycle has made domestic investment
more attractive to GCC investors than ever before.
One hypothesis that appears often in the media is that after
September 11, 2001, and the subsequent War on Terror, Gulf
investors repatriated their capital due to political and security con-
cerns. While it is clear that the bulk of Gulf investors oppose US pol-
icy in Iraq and elsewhere, attributing their preference for local
investment to the current political environment is, in my view, an
exaggeration. GCC investors, like most investors everywhere, are
principally concerned with returns. US equity markets dipped after
9/11 (due to a large number of factors unrelated to Gulf capital) and
lagged for years, while GCC markets were booming. At the same
time, US interest rates remained relatively low and bonds paid