The interminably quotable Winston Churchill once said, "History will be kind to me, for I intend to write it.

Of those writing the history for 2007, few will produce more gleaming accounts than the ones penned from Middle East boardrooms.

The successes, and failures, of last year provide the clues as to what will dominate the 2008 investment season - and undoubtedly, the most important phenomenon has been the emergence of Sovereign Wealth Funds (SWFs).

According to Chris Mayer, the editor of the Capital & Crisis investment newsletter and Mayer's Special Situations research service, the sheer magnitude of these waking giants renders them impossible to ignore when forecasting investment trends for the coming year.

"This year, the Gulf states passed China in terms of their foreign asset ownership. The six countries now have almost US$1.6 trillion in foreign assets, topping even China's US$1.1 trillion of foreign reserves.

"There are growing petrodollar stockpiles in the GCC," Mayer continues. "Along with China and other countries, the GCC is increasingly setting aside more and more of these funds to invest abroad - in stocks, real estate and private businesses. What they buy could have a huge impact on market prices... and your investments.

In fact, as we go to print with this issue, conflicting details are emerging about Saudi Arabia's intention to join the SWF party. The world's largest oil producer is rumored to have announced its intention to establish the world's biggest investment fund, estimated to be in the vicinity of US$900bn.

But these cashed-up government investment arms are not interesting merely because of their staggering size; the path of their capital may also provide some indication as to the direction of global liquidity flows for the year to come.

Poised to Buy Up Big in ‘08

The Abu Dhabi Investment Authority's (ADIA) signaled its intent with its giant bite of the Citibank pie in November.

In a deal that took only a few days to cobble together, ADIA sucked up a mammoth 4.9% of America's largest bank for US$7.5bn. The world's largest funds - ADIA (US$625bn), Norway (US$322bn), Singapore (US$215bn), Kuwait (US$213bn), China (US$200bn), Russia (US$127bn) - are clamouring to secure the largest war chest of foreign assets they can.

Eric Fry, editorial and investment director of Agora Financial, a US-based financial think tank, told Arabian Business oil-producing nations are being forced to be aggressive just to make decent returns.

"Vast wealth ­- like raw beauty - is a good problem to have, but owning hundreds of billions of US dollars may be harder than it looks. Many SWFs may be growing tired of buying T-bills that pay 4% per year in a currency that is losing value at 9% per year.

"Now that the dollar's value has become a bit shaky and unreliable," argues Eric, "the SWFs are moving into investment realms that they had previously shunned. Increasingly, the SWFs are choosing to become equity-holders in Western companies, rather than mere debt-holders.

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Dan Denning, author of The Bull Hunter: Tracking Today's Hottest Investments, and editor in chief of The Australian Daily Reckoning, agrees. Denning predicts further weakening of the greenback will spur continued buyout activity in the year to come.

"The recent SWF deals illustrate what an awkward position it is to own hundreds of billions of US dollars these days," Denning told Arabian Business. "You're hard-pressed to get rid of that much money, even if you're trying to. You have to take bigger and bigger risks.

According to McKinsey Global Institute, petrodollar reserves, of which SWF's constitute about 60% of total net worth, will grow from just over US$3 trillion to almost US$6 trillion by the year 2012. And here's the real kicker... that estimate is computed by factoring in oil at just US$50 a barrel, or about half what it costs right now.

With a wave of adjustable rate mortgage resets set to hit financial institutions in the US and the UK throughout 2008, a fresh round of defaulting borrowers look set to compound pressure on already cash-strapped lending outfits. As these companies look for quick, easy liquidity injections they may well turn to the deep pockets of Middle East funds.

Acquisitions of distraught foreign companies - think banks and other beleaguered financial institutions - will continue to pile up on the asset side of the Gulf's ledger in the months to come. As debt carries financial distress toward the upper echelon of the west's blue chip fraternity, the SWF's with the deepest pockets will stand to benefit from discount buys at the top level.

Seasoned traders looking to garner some quick profits will note that these injections often lead to sharp price spikes for distressed companies and, indeed, for whole sectors. In the hours following the Abu Dhabi-Citigroup announcement, shares of the bank shot up, dragging the entire financial sector with it.

But bad debt is, of course, still bad debt, regardless of who owns it. It wasn't long before tempered prudence replaced irrational optimism and the market returned to more modest levels. The trick here is studying where the money is likely to be pumped in... and, more importantly, when you need to get out.

Infrastructure Boom

You don't have to be the world's largest sovereign wealth fund, or a seasoned trader with an appetite for risk, to take part in a wave of Middle East investment trends in 2008.

The GCC is also spending its petrodollars on infrastructure capacity in its own backyard. Astute investors who track the companies likely to take the biggest tender will take the biggest profits.

"Infrastructure is the big investment theme in the Middle East," explains Mayer. "Simply put, many Middle Eastern countries have so many needs - and are growing so rapidly - that increased spending looks inevitable. So, finding companies that profit from this growth could garner substantial returns for forward-thinking investors.

"Dubai, for example," Mayer told Arabian Business, "needs lots of water and power infrastructure. Its needs look even more desperate given an ambitious development pipeline, ­ some US$300bn in real estate projects over the next 10 years. Getting water and power to those projects will be a challenge.

Mayer first highlighted the "water-themed" investment curve with a 2006 Blue Gold Water Report, a report that identified companies like Lindsey Corporation, which his readers had the opportunity to sell for a 100% profit.

"Already, there are strains," Mayer continues. "An inability to connect with power and water supplies has led to the delay of a number of projects. It's a bottleneck that isn't going to get any easier to pass through.

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"According to the Dubai Electricity and Water Authority (DEWA), the demand for power rises 20% on average, each year. For water, it is about 15%.

Dubai, of course, does not suffer this burden alone. In fact, power and water supplies are a key issue for the entire UAE and for the broader Middle East region. A recent report by Arab Petroleum Investments Corporation reveals the UAE will spend US$61bn boosting power and water supplies by 2011.

"What's especially interesting about this," Mayer told Arabian Business, "is that the UAE isn't even the biggest spender. The private sector is set to overtake the government as the main supplier of new water and electricity supplies in the Gulf. This has never happened before. For the first time, according to forecasts, private sector water and power supplies will account for the majority of new deals in 2008.

"So, the investment dollars are coming," concludes Mayer, "and those companies that build power and water systems look like they'll have plenty of work to do.

Earlier this year, alternative investment company, Gulf Capital, acquired 60% of Metito Group, the largest Arab water engineering and concession company in the region. According to Imad Ghandour, the head of strategy and research at Gulf Capital, "Governments in the region are paying attention to the mounting need for fresh water, and have increased their investments in the water sector. Around US$117bn is expected to be invested in the Middle East between 2005 and 2015, an increase of 59% compared to the previous decade's investment.

One company glad to capitalise on the construction boom in the water-starved Middle East is Veolia Water. The French outfit specialises in reverse osmosis and recently won a US$115m contract to run operations and maintenance in a desalination plant in the UAE. The plant, located in Fujairah, will use the reverse osmosis technique to produce some 136,500 cubic metres of desalinated water per day.

The Middle East in '08: The Building Blocks

Chris Hancock, editor in chief of the Free Market Investor, agrees.

"The fundamental lack of natural resources like timber and water force countries in the Middle Eastern States to adopt certain materials and technologies," Hancock told the magazine.

"The utter lack of vegetation (forests), for example, forces regional economies to use concrete as the principal building material.

"Infrastructure, especially the demand for steel and cement, will continue be big business for several years," Hancock says.

Investments in the regional construction boom now top an incredible US$2.4 trillion for projects either underway or in development. Total cash being pumped into the civil construction sector - residential buildings, tourism constructions etc - alone, is just shy of the US$1.4 trillion mark.

That's more than construction in oil, gas, power, water and other petrochemical and industrial sectors combined.

The scale of investments going on in the region can be seen from three of its largest projects. They are King Abdullah Economic City, Saudi Arabia at US$120bn; Silk City Project, Kuwait atUS$86bn; and Dubailand, UAE at US$60bn.