Investors who picked Middle East stocks as an insurance policy say high oil prices still make the region a better long-term bet than many emerging markets.
For all the talk of their ability to withstand global financial market weakness, stocks across the Middle East tumbled this week in line with other emerging assets, recalling the 2006 crash that wiped billions of dollars off their value.
Yet, looking beyond the falls, it is difficult to argue against the region's massive oil-backed surpluses, the likelihood of currency appreciation in the medium term and the countries' attempts to diversify their economies.
"The Gulf is fundamentally sheltered from this global storm, as long as oil prices remain high," said Philip Khoury, head of research at Egyptian investment bank EFG-Hermes.
A vast pool of local money, a pipeline of planned stock listings - over a hundred by some counts - economic growth above 5 percent and relatively low valuations all add to the lure. In the past year, foreigners have flooded into the more liquid Arab markets or bought into companies and countries exposed to the Gulf. For instance, fund consultancy EPFR reported allocations to Egypt - often used as a proxy for the Gulf - climbed to a seven-year high towards end-2007.
All that fed into hefty gains in regional indexes last year with Dubai rising 44 percent, Abu Dhabi 52 percent, Qatar 34 percent and even the hard-to-access Saudi market 41 percent. The Cairo exchange also gained almost 40 percent.
Michael Hartnett, head of emerging equity strategy at Merrill Lynch, identifies the Middle East as the pick of the frontier markets - under-developed markets that are less liquid and less correlated with global markets but offer better returns.
The lower the correlation, the less a market tends to react to global swings, making it a good play during volatile times. Hartnett estimates the recently launched MSCI frontier market index, of which Gulf stocks comprise 65 percent, has a monthly return correlation of 31 percent with the US Standard & Poor's stock index, versus 73 percent for mainstream emerging markets.
Analysts say recent falls on Gulf bourses were driven by investors' need to re-jig portfolios and take profits in markets where they are still in the money. And markets largely recovered on Wednesday after countries like the United Arab Emirates and Kuwait followed the United States in lowering borrowing costs. Dubai led the Gulf rebound, surging a record 10.5 percent, and markets stabilised on Thursday.
"As more and more foreigners have been buying, correlation with developed markets has gone up," said Nudgem Richyal, who co-manages $2.5 billion in emerging equities at Barings Asset Management in London. "But at the margins, the correlation is still going to be a lot less than mainstream emerging markets," he said, adding he plans to use any turbulence to double Gulf holdings to 10 percent of his portfolio.
The stocks are still considered cheap. Until recently, trailing price-to-earnings valuations were 14.4 times, Hartnett estimates, versus 17 times for the MSCI benchmark emerging index. "Within frontier markets, the Middle East markets look the most compellingly cheap," he says.