Dedicated regional funds could fill void left by Western fund houses

Gulf funds are re-prioritising domestic markets as primary destinations for petro-dollars wealth

With the Western fund houses in retreat, who will ride to the rescue of the regional stock markets? Look to within for the answer.

'The void left behind by Western institutions will be filled to some extent by dedicated regional funds', comments EFG Hermes in the MENA market overview. 'Although this investor class is still at a nascent stage, some of the established names are of a very substantial size.

'On balance therefore, we would expect to see a moderate level of entry with room for upside surprise'.

The full impact of their entry in greater numbers and the financial clout will start to be felt from next year. The other investor class to watch out for would be the sovereign wealth funds (SWFs) originating from the Gulf.

'Over the past few years, excess petro-dollar wealth has been invested overseas. The credit crisis combined with heavy losses in domestic markets has led SWFs to re-prioritise domestic markets as primary destinations for their petro-dollar wealth.

'We can therefore expect some level of support through direct and indirect liquidity injections, though we believe that such support is likely to be made only on an 'as needed' basis and should not be considered as part of a recurring source of liquidity for the stock market'.

But making do with a limited Western institutional presence would take some getting used to. In the last two years, they set the direction for the stock markets even when domestic retail investors provided the bulk of the liquidity.

Again, it is a time for retail investors to claim the status that is due to them.

The EFG Hermes report agrees: 'With stocks now trading at levels not seen in the past two years, we see strong potential for retail investors to play a more important role than previously.

However, we suspect many retail investors suffered heavy leverage-led losses, which suggests a measured recovery in overall retail appetite'.

Also, a degree of Western presence will still be there.
'The current investment climate has escalated risk aversion levels to the point where a substantial portion of Western institutional investors are not interested in exposure to growth, regardless of its assuredness'.

'We expect moderate entry from Western institutions this quarter, with risk aversion and valuation preventing a mass entry in the near term.

'Going forward, we believe ongoing volatility in US markets (and by proxy, global markets also) will result in Western institutions flows exhibiting a pattern of intermittently entering and exiting MENA depending on the relative attractiveness of local markets.

'The large fund sizes, relative to MENA stock markets, suggests that markets such as UAE, Qatar, Oman, Saudi Arabia and Egypt can expect increased volatility during these times'.

Excerpt

'There will remain a small portion of long-only funds (from Western institutions), dedicated to the MENA region or frontier markets in general, that take a longer term view and therefore have a more consistent investment approach.

Such funds have benefited from better liquidity positions, allowing them to opportunistically build up positions in select names across MENA.'

This explains why some stocks, notably Arabtec, continue to have foreign ownership levels close to the maximum despite the heavy net selling by non-Arab funds'.

Excerpt from EFG Hermes report