New Investment Strategies for the GCC?

Celent, an international strategy consulting firm, last Monday released a report that made the most detailed projections for the future of Gulf investment to date.  The report, in its entirety, is available only to subscribers but a summary of its findings may be found on zawya.com (linked here: Gulf Investors Alter Portfolios to Focus on Asia Investments).  The report may not be particularly profound in suggesting that more Gulf money will flow to Asia-- it's something that many of us who cover these issues have been watching since the beginning of the oil surge 5 years ago.  Investment flows between Asia and the Middle East grew rapidly in 2007, in particular, and, until the unraveling of global credit markets and oil prices, such trends would have likely continued this year.  Particularly interesting, though, is the rate of change in asset allocation Celent predicts will guide Gulf investment between 2010-2015.  Celent estimates that by 2015 Gulf investments in the US will constitute only 30 percent of Gulf countries' portfolios (down by 10 percent from today.)  Europe will also see a decline, falling by 5 percent to total 10 percent of Gulf asset portfolios by 2015.  In Celent's estimation, the biggest gainers in these shifts will be Asia and Africa.  One wonders if Qatar was looking to confirm these predictions with its announcement of new projects in the Philippines, which could total up to $1 billion.  

Such predictions come at a particularly unfortunate time for the US.  The US in the past eight years has relied on global imbalances, particularly the huge trade surpluses being generated in China and the Persian Gulf, to fund its chronic deficits.  Even today with global imbalances unwinding, the US has no good option to finance its continuously growing deficits (which could reach as high as $1 trillion this year if the bailout and fiscal stimulus packages being discussed are all adopted) beyond debt issuances.  This report suggests one big misunderstanding in that strategy: that Gulf appetite for US debt will remain strong.  Beyond the geographic shift, Celent suggests that while Gulf investment appetite for fixed income is likely to remain steady (albeit not incredibly high), its desire for equities will decline sharply.  The second misnomer with debt issuances is that buyers still have the financial wherewith all to buy and to buy at levels previously seen.  With the sharp fall in oil prices, this is no longer the case.  The IIF is forecasting that Gulf surpluses will be whittled down to $48 billion in 2009 from a high of $321 billion in 2008.  Samba, in a recent report, is not so sure things will look smooth for Saudi Arabia if oil prices hover around $40/barrel for an extended period of time.  (Oil at $40 Will Impact the Saudi Economy)   

One last interesting thing to note about this report is its forecast for asset class allocation.  As I mentioned above, Gulf interest in equities is forecast to go down, along with allocations towards real estate ventures.  Celent forecasts some growth in deposits, but the largest growth area for Gulf investment is alternate investments.  What those alternate investments might be is unclear (at least in the synopsis of the report posted in Zawya) but I'll be curious to see how the money gets allocated.  With so much talk in the US about a possible green revolution, it would be ironic yet somehow fitting if the world's biggest purveyors of the fossil fuel economy were providing the funds for its unraveling.