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John Burbank Most Bullish on Saudi Arabia

June 09, 2011

John Burbank of Passport Capital recently revealed his No. 1 investment idea for 2011. Burbank has invested 11% of his fund in Saudi Arabia.

Burbank gained fame for making a 220% net return in 2007 after shorting subprime mortgages.

As most investors pull money out of the MENA region, Burbank has been making the contrary investment of pumping over $200 million into stakes of publicly traded petrochemical companies, banks, construction firms and even health-care providers.

First of all, Burbank is well aware of the risks from investing in the oppressive regime. Burbank does not expect that the Saudi regime will be overthrown.

“The crisis isn’t affecting the long-term reality that this is where the oil is,” said Burbank. “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.”

As the Saudi monarchy pursues a massive infrastructure program, Burbank sees the country opening to foreign investors in much the same way that other emerging markets such as India did over the past decade. Less than 1% of equities traded on the Saudi Arabian Stock Exchange are controlled by outsiders. This year, King Abdullah Bin Abdulaziz has directed more than $80 billion to be spent on home building, and his advisers approved changes to mortgage laws to permit private investment in housing loans.

Burbank is staking his claim with the expectation that more foreigners will start to invest in Saudi Arabia. If more capital flows into the country, valuations of Saudi equities should rise. “It’s a fantastic, idiosyncratic risk,” Burbank says.

Burbank does not see any major risk of oil prices collapsing. However, his bullish Saudi bet is not necessarily a bet on a steep rise in the price of crude. He simply expects that most of the Saudi wealth will be re-invested back into the local economy. As foreigners catch wind of this, equity prices should rise.

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