How Emerging Market Funds Provide Exposure to Energy Commodities
Another great way to capitalize on oil profits is to invest in an emerging market fund that invests in commodities in countries that both sit on large deposits of crude oil and have the infrastructure in place to export crude oil.
A country may have large deposits of crude oil, but it isn’t necessarily able to produce and export crude oil for a profit. Iraq is a good example. Even though it sits on the third-largest reserves of crude oil in the world, Iraq isn’t even one of the top ten exporters of crude because its infrastructure and security environment isn’t secure enough.
Countries that export crude oil have seen their current account surpluses reach record highs. (Current account measures a country’s balance of payments as they relate to trade.)
These windfall profits are having a tremendous effect on the economies of such countries. The stock markets of some of these countries, particularly the Persian Gulf countries (known as the Gulf Cooperation Council, or GCC), have had a remarkable run during the first decade of this century, averaging double-digit compounded annual returns.
As their economies have grown from their hydrocarbon wealth, these countries have established sovereign wealth funds (SWFs) to diversify their earnings and holdings away from petroleum products.
Many Persian Gulf countries have large capital resources that they’re deploying across global capital markets and asset purchases. Abu Dhabi, the city-state with the largest oil reserves in the United Arab Emirates, has established the Abu Dhabi Investment Authority (ADIA), the Abu Dhabi Investment Council (ADIC), and the International Petroleum Investment Corporation (IPIC) to invest its hydrocarbon receipts.
This move has resulted in a broad and significant diversification of Abu Dhabi’s economy away from petroleum and into other strategic sectors, such as technology and aerospace. The local stock markets are a great way to get exposure to these economies, and you can also follow private equity opportunities as an investor.
The current account surplus is an important measure of how much a country is benefiting from the current oil boom. For example, Saudi Arabia’s current account surplus reached a record-setting $150 billion in 2005, thanks largely to its oil exports. OPEC countries are expected to generate a whopping $500 billion current account surplus in 2006 because of the high price of oil.
For the uninitiated, investing directly in emerging markets can be a risky proposition and requires a lot of research. Some countries have different regulatory rules than the United States, and you need to know those rules before you get involved in a foreign venture.
One way to play emerging markets while avoiding direct risks is to invest in emerging markets funds located in the United States. These funds hire professionals who are familiar with the business environment in target countries and can navigate these foreign investment seas. These funds enable you to take advantage of booms in foreign countries, while remaining within the safe regulatory and investing environment of the United States.
A couple emerging markets funds give you indirect exposure to the booming oil-exporting countries:
Evergreen Emerging Markets Growth I (EMGYX)
Fidelity Emerging Markets (FEMKX)
If you’re interested in finding out more about the global oil industry, check out Daniel Yergin’s masterpiece on the subject, The Prize: The Epic Quest for Oil, Money and Power (Free Press).