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Is Middle East Set to Become Next Big Emerging Market?

The Goldman Sachs executive who coined the term “BRIC”a decade ago to represent the emerging market economies of Brazil, Russia, India and China said that a post-revolution Middle East and North Africa (MENA) could rival that economic group one day.

Protests in Libya
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Protests in Libya



“If I look at the whole region together, then just at Africa in general, MENA has the combined potential to be a BRIC-like economic group,” said Jim O’Neill, Chairman of Goldman Sachs Asset Management, in a note to clients. “In this spirit, and despite all the horrible things happening in some of these places, this revolution strikes me as being essentially rather bullish.”

Investors buying shares this month may be using the same long-term viewpoint of O’Neill, who was formally head of global economic and commodities research before Goldman CEO LLoyd Blankfein tapped him to head the firm’s asset management unit. The S&P 500 is headed for its third straight monthly increase despite a coup in Egypt, an ongoing rebellion in Libya and a subsequent spike in oil above $100.

Egypt’s military rulers are planning for democratic elections in six months. Meanwhile, the days look numbered forLibya’s dictator Muammar Gadaffi after the UN implemented trade and financial sanctions and anti-Khaddafy rebels controlling the eastern region of the country made plans to restart oil production. Oil fell below $98 today.

“There’s an enormous potential ‘Peace Dividend’ for rest of the world when the MENA region discovers the joys of capitalism/middle class,” said Joshua Brown, money manager and author of The Reformed Broker blog.

Egypt is second only to Pakistan in terms of population in the region with 82 million people. Iran has 77 million people and Pakistan has 187 million. By comparison, China is the world’s most populous country with 1.3 billion people. The U.S. has a population of 313 million.

“Egypt has the potential to grow dramatically in coming decades if their 80 million—and rising— population is allowed and encouraged to enjoy the same opportunities many of the rest of us face,” said O’Neill. Also, a different leadership in Iran “would be especially interesting as, below the surface, Iran has some attributes that would allow the country to advance much more easily than others.”

The key with the ongoing and future revolutions in the region, according to O’Neill and other optimistic long-term investors, is that these are not religious revolutions, but economic ones. With inflation driving up basic costs for an unemployed and young populous, the latter seems to be the more likely scenario.

“For Western leaders, many of whom have needed to make complex arrangements with regimes they perhaps didn’t particularly admire, it is presumably important that they shift gears to support these middle class aspirations,” said the Goldman strategist. “It is also important in terms of the battle against terrorism as, at least so far, the terrorist groups have been dealt a major blow.”

Unlike many others studying the long-term impact of these revolutions, O’Neill does not necessarily mention the fall of Saudi Arabia as key to the region’s transformation. The country, after all, has one of the smaller populations at 26 million.

The monarch implemented a new wealth distribution plan this month allowing it to keep the peace among the population. Similarly, China allowing its middle class to flourish is one way its been able to become the second biggest economy in the world while retaining its Communist regime.

To be sure, O’Neill does not mention any specific trades in this initial report as the end game here is certainly far off, maybe so far off for this generation to even discuss at this point, some investors said.

“These countries have significant structural and ideological challenges that the BRICs either never faced or were conquered long ago,” said a skeptical Stephen Weiss of Short Hills Capital. “Their governments were more advanced and their infrastructures, in their core regions, more developed. They also did not suffer internal division between disparate groups more focused on religion than commerce.”

Still, maybe the stars are finally aligning for this long-troubled region to transform itself, and at a quicker than expected pace. The goal of this revolution seems to be not to destroy the West, but driven by a young population that is connected to the rest of the world via the Internet and wants to be a part of that world. Fiver years from now may not be talking about buying the BRICs, but rather making a market in MENA.

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.


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Trader disclosure: On Feb 28, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Seymour owns (AAPL); Seymour owns (BAC); Seymour owns (F); Seymour owns (FXI); Seymour owns (GE); Seymour owns (POT); Seymour's firm owns (TTM); Adami Owns (AGU); Adami Owns (C); Adami Owns (GS); Adami Owns (INTC); Adami Owns (MSFT); Adami Owns (NUE); Adami Owns (BTU); Adami's wife works for (MRK); Finerman's Firm Is Short (IWM); Finerman's Firm Is Short (SPY); Finerman's Firm Is Short (MDY); Finerman's firm is short (XRT); Finerman's firm is short (IJR); Finerman's Firm Is Long S&P Puts; Finerman's Firm Is Long Russell 2000 Puts; Finerman's Firm And Finerman Own (AAPL); Finerman's Firm Owns (BAC) Leap, Finerman Owns (BAC); Finerman's Firm Owns (BBY); Finerman's Firm And Finerman Own (BP); Finerman owns (C); Finerman Owns (GOOG); Finerman's Firm And Finerman Own (HPQ); Finerman's Firm Owns (IBM); Finerman's Firm Owns (JPM), (JPM) Leap; Finerman Owns (JPM); Finerman's firm owns (M); Finerman's Firm And Finerman Own (MSFT); Finerman's firm owns (TGT); Finerman's Firm Owns (WMT); Terranova owns (VRTS); Terranova owns (C); Terranova owns (UPL); Terranova owns (ABT); Terranova owns (MS); Terranova owns (PBR); Terranova owns (BAX); Terranova owns (TEVA); Terranova owns (CVI); Terranova owns (RSX); Terranova owns (SU); Terranova owns (CNQ)

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