Stock markets in Middle Eastern countries could become more attractive to Western investors as the reconstruction of Iraq leads the way for the region.
"The new administration (in Iraq) will have an active capital market," said Mark Mobius, emerging markets guru of Franklin Templeton Investments, Hong Kong. He pointed out that many of the 20 million Iraqis have a higher education level and are more sophisticated about investing than residents of other Middle Eastern countries.
But other managers were less sanguine.
"The markets in Jordan, Morocco, Pakistan and Egypt are highly illiquid," said George Hoguet, director of emerging markets for State Street Global Advisors, Boston.
Mr. Hoguet thinks that foreign direct investment and private equity investments in companies in those markets will precede stock market investments. He added that there had been some interest by the U.S. State Department to put together a Middle East investment fund, but it hasn't gone anywhere so far.
"There's a strong desire on the part of the U.S. government to promote foreign investment in the region," said Mr. Hoguet. "But they need a strong legal framework and secure political conditions (in those countries)," he added.
Sanctions must go
Mehran Nakhjavani, portfolio manager for emerging markets for UBS Global Asset Management, Chicago, said that before any Western investors go into Iraq, "the U.N. sanctions would have to come off; the capital controls would have to come off; and accounting standards would have to be reformed."
Turkey's stock market is better developed than Iraq's and has already attracted investments from Western investors - but even there, "the whole market is trading on geopolitical optimism," said Mr. Nakhjavani.
The Turkish market has attracted more Western interest on the belief that Turkey would get a lot of U.S. financial aid, he said, adding that "there has been a huge amount of volatility in the market as they await a big check from Uncle Sam," Mr. Nakhjavani added.
He said the Iraqi stock market, which was started after the 1991 Gulf War, was up about 40% in November and December as Iraqis anticipated the U.S. invasion and as the Saddam dinar, the currency with Saddam Hussein's picture on it, started to depreciate.
Mr. Mobius said the so-called Iraqi Swiss dinar, the currency without Mr. Hussein's picture on it that is only used in northern Iraq, was "going through the roof" and increasing in value versus the U.S. dollar immediately after the U.S. invasion. Mr. Mobius believes the Iraqi Swiss dinar will be the accepted currency in the reconstruction.
Emerging market officials from other money management firms are less sanguine than Mr. Mobius about the prospects for the development of stock markets in the Middle East.
Mr. Hoguet said that the elimination of the Hussein government in Iraq "is analogous to the fall of the Berlin Wall - that was what ushered in a new wave of investment in emerging markets." However, he added, "it's too early to say if this invasion will bring peace to the Middle East or lasting stability to the governments there."
With the redevelopment of the stock market in Iraq, "we're in the very early phases. Even under the best scenario it will be some years before Iraq has a vibrant stock market," he said.
"While the (Middle East) region is something we'll monitor as an investment possibility, with other stock markets so cheap now, it won't fall on our radar screen in the near future," said Brent Jones, a portfolio manager for emerging markets at GE Investment Management, Stamford, Conn. "It's an unstable geopolitical area at the macro country level."
Mr. Mobius' long-term dream for the region is that with more democratic governments and a peace treaty between Israel and its neighbors, a regional stock market including all the Middle Eastern countries will become reality. He pointed out that the Israeli stock market is already very active and it could become a major portion of a Middle Eastern regional stock market.
"It makes sense for where you have a lot of small countries and small stock markets to have a regional exchange," said Mr. Hoguet. "But I see it as the tail at the end of the dog. If you get a new generation of Arab leaders who want peace with Israel, it will be possible."