With his flowing white robes and embroidered turban, Ashraf Al-Nabhany might not look right at home on Wall Street. But as executive vice-president of the Muscat Securities Market in the Sultanate of Oman, Al-Nabhany is frequently receiving visitors these days from outfits such as Morgan Stanley & Co. and Merrill Lynch & Co. And when he has a spare moment, Al-Nabhany heads to the local schools to teach the ABCs of stock ownership to Omani children. "You have to start them young," he says.

It may not grab headlines in a region where fundamentalist mobs and civil wars fill the news. But a growing number of intrepid institutions are foraging for value in the stock markets of Morocco, Tunisia, Egypt, Jordan, and Oman. Since mid-1994, New York's Alliance Capital Management, London's Foreign & Colonial, Merrill Lynch, and Baring Securities have launched the first investment funds focusing on the Arab countries of North Africa and the Middle East. The money managers don't seem deterred by the impact of Mexico's meltdown or the tenuous nature of the Israeli-Palestinian peace talks. Says William A. Stoops, director of emerging-market sales for Baring Securities Inc. in New York: "There is a lot of risk out there now, but the [long-term] growth is out there too--big growth."

The strategy is simple: Although the Arab markets are tiny compared with those in Israel and Turkey, where market capitalizations run at $22 billion and $34 billion, respectively, Middle Eastern states have recently begun opening their long-sheltered economies (table). As they deregulate, Arab markets could become vehicles for investing in the region's banks and oil companies. Says Alan Albert, senior managing director of Merrill Lynch Global Asset Management: "The idea is to have a structure in place for when these markets start moving." Merrill Lynch has set up a $15 million Middle East fund for U.S. investors.

Oman is one fledgling market attracting the money managers' attention. The nation of 1.5 million would seem to have little going for it except its location at the entrance to the Persian Gulf. Despite annual income of about $3 billion from crude oil exports, the Omani government is running budget deficits of up to $1 billion a year, thanks to its outlays on social welfare and defense.

But now, Oman is attacking its deficit. To raise revenues, it is levying its first corporate income tax. And to control spending, it is farming out infrastructure projects to the private sector. The Middle East's first privately held power station will be partly financed by a share issue on the Muscat exchange. These days, new issues are coming to market at the rate of about one a month.

It's a similar story in Morocco, where privatization is fueling activity on the Casablanca Bourse. In mid-January, investors oversubscribed by five times the public offering of Banque Marocaine du Commerce Extterieur, the country's first bank sell-off. Meanwhile, Egypt has seen a boom in mutual-fund investment. Even war-torn Lebanon passed new legislation last month designed to get the Beirut Bourse up and running.

LONG HAUL. Of course, problems remain. Many companies on Middle Eastern exchanges are thinly traded, making it difficult to move in and out of the markets quickly. And despite efforts at economic liberalization, many countries still limit foreign share ownership. Only one non-Omani mutual fund--the Oryx Fund managed by Baring Securities--has been allowed to invest in Omani shares.

The region's tortured politics will probably warn off all but the most iron-willed investors for some time to come. As long as governments mix religion and politics, worries Mark Mobius, who manages a $7 billion emerging-markets portfolio for Templeton-Franklin Funds, the free market will never come fully into its own in the Arab world.

Still, he's not leaving any opportunities unturned. Later this year, he says he plans to visit Tehran's "thriving" stock exchange--even though the pilot of his Gulfstream jet is afraid of entering Iranian airspace. "I told him not to worry so much," Mobius says. That's also his advice to investors considering a long-term bet on the Middle East's emerging markets.

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