Low trading volumes and limited liquidity mean the importance of the UAE and Qatar stock markets has been overplayed and the real investment opportunity in the GCC region is Saudi Arabia, according to one leading Dubai-based fund manager.

The decision by MSCI not to upgrade UAE and Qatar from frontier to emerging market status in June this year prompted international attention on the region’s potential for foreign investors. But according to Nadi Bargouti, Dubai-based head of asset management at SHUAA Capital, both trading volumes and fundamentals in the Saudi market are more favourable.

Last week saw Dubai Financial Market (DFM) volumes of about $40m change hands daily, versus about $800m on the Saudi stock market (Tadawul). But according to Bargouti, DFM trading volumes are typically much lower at about a $20m.

Indeed one person Global Investor/isf spoke to said that turnover on the Dubai exchange is so low that during the US-downgrade led market turbulence 65% of securities did not change in price.

According to Bargouti the low level of liquidity on the Dubai exchange makes it difficult to place even relatively small amounts of capital. “We recently received a subscription to our Emirates Gateway fund, of $20M and we had to ask the client to do it in instalments of $5m every week. Can you imagine the impact of depositing $20m into a market only trades that amount per day?”

International investors are instead talking about Saudi. “The UAE and Qatar have higher visibility, and easier access, but if you talk to most investors they have a much larger exposure to Saudi Arabia – it’s a deeper, diversified, much more liquid and more fundamentally sound market,” said Bargouti.

The Saudi market was opened to international investors in 2008 and is still only accessible via total return swaps with local banks – sometimes referred to as promissory notes. According to Bargouti, even though this costs a lot more –  40-50 basis points to access the Saudi market versus 20bps for the UAE/Qatar – it is not deterring investors.

One such investor is Passport Capital, a $3bn San Francisco hedge fund which made a 220% return in 2007 shorting sub-prime mortgages (although it followed this with a 50% fall in 2008). Passport Capital is a major shareholder in SHUAA Capital and in a recent interview, its CIO and founder John Burbank, was clear about Saudi’s attractiveness. 

According to Burbank, despite instability across the region the fundamentals of Saudi are compelling. “We want exposure to the Saudi economy because the prices are very cheap and there’s going to be a lot of growth and higher returns on capital, and that’s something that’s likely to play out over a number of years,” he told Bloomberg.

But not all fund managers in the GCC region are convinced by the Saudi story. Fadi al Said, head of Middle East and Africa for ING Investment Managers, is concerned about operating in Saudi – with conditions even more difficult for direct investments.

“There are unique investment opportunities in Saudi – Petrochemical firms, for example. But the Saudi market is not easy to do business in, particularly if you are making direct investments.

“People think there is lots of low-hanging fruit and they can go in easily. But it’s a tough market and there is a way of doing business there. You need a local partner, otherwise you might get lost. It doesn’t matter how big or experienced in doing business you are,” said Bargouti.