Business | Features
Testing times for Mideast markets
Though region begins to realise it is not immune to global turmoil, fund managers see good earnings growth potential on strong fundamentals
- By Ruth Sullivan, Financial Times
- Published: 23:31 October 28, 2008
Storm clouds are piling up in the Middle East - oil prices are falling, regional liquidity is tightening and investors are fleeing from plunging equity markets as the region begins to realise it is not immune to global financial turmoil.
But, in spite of the changing landscape, fund managers still see good earnings growth potential and buying opportunities.
"Return on equity and growth in the Middle East and North Africa is superior to other emerging markets currently," says Amr Seif, portfolio manager for the Middle East and North Africa at Investec Asset Management. "Companies in the region have more growth in their earnings than peers such as Russia and eastern Europe," he adds.
Seif sees infrastructure projects such as waste water treatment, desalination and medium- to low-cost housing among the sectors that will drive returns in the future and eyes the region from a stock rather than a country approach.
Investors can also take comfort from the International Monetary Fund's recent quarterly economic outlook on the Middle East and central Asia. It expects growth to tail off slightly next year because of lower oil prices but to be largely resilient to the global economic turmoil. It has eased its gross domestic product growth forecast for the Middle East and North Africa from 6.3 per cent this year to 5.9 per cent in 2009.
Slower growth
At HSBC Global Asset Management, Andrea Nannini, head of Middle East and North Africa, says Gulf markets are now seen as being more correlated to their western counterparts than a few months ago. "The Middle East has been coming off [its highs] and correcting in the past few months and we will see slower growth and less liquidity in the economy. But it is still doing relatively well," he says. In spite of such forecasts, investing in emerging and frontier markets will not be for the faint hearted as Gulf Cooperation Council markets, in particular, have seen sharp drops from highs in late 2007 and earlier this year.
Across the Middle East and North Africa (Mena) funds have had 11 weeks of consecutive net outflows to date and $823m (Dh3 billion) has been withdrawn from funds since August 13, according to US-based fund tracker EPFR Global. But the bright spot is that funds have also been holding on to net inflows of $1.4b in the year to date.
"Investors are withdrawing primarily due to the fear and panic from the current global margin call that is forcing investors to withdraw indiscriminately from most markets," says Brad Durham, EPFR managing director.
"There is concern over falling oil prices and in some cases the banking sector's exposure to local property markets that are weakening. But with GDP growth rates for GCC markets forecast at 6 per cent this year the region is generating some of the strongest growth in the world."
He says corporate earnings are also holding up well in the region, which trades at a historically low 9-12 times price/earnings ratio. "So I suspect when frazzled investor nerves calm, strong flows will resume into these markets."
Grant Bailey, Dubai-based chief executive of ING Investment Management in the Middle East, agrees with Naninni that a significant part of investor attraction to the Middle East has been its lack of correlation to western markets. "All that has changed in the past six weeks," he says. But he believes there is a more confident view of the region from the ground than from London or New York.
"It is not all doom and gloom here and there is still potential for investors," he says.
"States in the region still have some strong fundamentals and are balancing their budgets to an oil price well below $70 a barrel, with some states pricing in estimates as low as $35 a barrel. Any higher price would be a windfall." The IMF estimates governments of Gulf states are likely to balance budgets at an average price of about $57 a barrel this year.
Investor potential
Bailey sees enough investor potential in the current climate to launch ING's first Mena equities fund next month. He expects a slower rate of investor interest in the Luxembourg based open-ended fund than anticipated but believes the Mena region "is still a growth area in the medium and long term".
He sees good value in some companies in the financial, construction and property sectors across countries and says he will have no difficulty in building up a portfolio of about 30 attractive stocks.
Although appetite from investors in North America, Asia and Europe has fallen off, he is expecting interest from domestic investors and sovereign wealth funds. ING is also planning other new funds, including a fixed income fund to meet demand in the region.
But Nannini is taking a more cautious approach and postponing the launch of a Mena equity fund in the pipeline. "We are waiting for the markets to stabilise first," he says.
HSBC Asset Management, which has about $6bn of assets under management in the Middle East, is prepared to wait at least until the end of the year.
"These markets move fast as local retail investors go in and pull out quickly. A lot of short-term investors, particularly hedge funds, took the money and exited," he says.
Investors who worry about further contagion from the global credit crisis and loss of liquidity in the oil-fuelled region may gain confidence from recent government moves in the Gulf to strengthen national banking systems. But in spite of such measures, strong stomachs and an adjusted view of the region will be needed.
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