Foreign investors yet to wake up to MENA’s potential

The Middle East and North Africa (MENA) region has often been associated with the oil and gas industry and for obvious reasons. Eight of the 14 countries that make up the Organisation of the Petroleum Exporting Countries (OPEC) are from MENA and collectively, they account for more than half of the world’s crude oil reserves.

However, from an investing standpoint, the region has much to offer than its fossil fuel riches, according to investment managers, who discussed MENA’s role in the broader investment landscape, during FundForum Middle East on Monday (21 November) in Dubai.

“Oil obviously is a big factor in the regional growth story, but what we really like about MENA is its [strong consumer base],” said Karl Tonna, CIO of FMG Group, which specialises in emerging- and frontier-market investments.

Home to more than 350 million people – majority of whom live in middle-income countries – MENA boasts a young and educated population.

“Countries such as Saudi Arabia, Egypt, Qatar, the UAE and Kuwait, for example, are in different transition phases, each has its own fiscal and political scenes,” Tonna said. “And while GCC countries may still be far off from mainstream emerging markets like the BRICS, they are nonetheless growing. What is also interesting about MENA is its uncorrelation to the rest of the world and the EM public equity.”

Habib Oueijan, Head of MENA and Frontier Markets at Aventicum Capital Management, said investing in MENA has not been about investing in oil.

“Twenty years ago, when I first started covering the region, investments were mostly focused on banks. Now, as the economy developed –  buoyed by governments’ fiscal surplus – we’ve seen an interest in sectors such as healthcare, education, tourism and logistics,” he explained.

Aventicum Capital, which launched its MENA and Frontier Markets equity strategies three years ago, does not have any hydrocarbon company in its portfolio, according to Oueijan. “This is because we realise foreign investors come to this region for tangible assets that [impact] the vast population. In terms of correlation, MENA is also a well-diversified portfolio, within a global mandate.”

Untapped potential

Zin Bekkali, CEO and Founder of Silk Invest, a UK-headquartered investment manager focusing on Africa, Middle East and Frontier Asia, said the GCC and North Africa, in particular, have several good companies.

“Each of them has a valuation and growth angle. They’re fascinating and yet not fully understood or appreciated because of several factors. One of which is the lack of sufficient institutional money allocated to the region,” Bekkali commented.

He went on to say that the region does not have a significant number of traditional asset managers.

“Some of the big institutions are investing their money elsewhere. Sovereign wealth funds, for example, are putting between 70% and 90% of their assets outside the region,” he added. “We also don’t have a lot of pension funds, while mutual funds are not developed. It’s a pity because the region has a young population and there’s growth in financial assets.”

Despite the MSCI upgrading UAE and Qatar to emerging-market status in 2013 and Saudi Arabia opening its stock exchange (Tadawul) to foreign institutional investors last year, the panellists said more needs to be done to raise MENA’s profile in the global equity space.

“There are not that many institutional managers and foreign investors looking at MENA, and I think it’s because the Western media does not [report] on corporate earnings from this part of the world,” said Tonna. “In our Iraq fund, for example, we hold Baghdad Soft Drinks Co, which keeps delivering quarter-on-quarter performance and has good valuation, but not a lot has been written about that because there’s no Western press following it.”

However, the investment managers believe Saudi Arabia’s recent record-breaking US$17.5-billion bond and the potential listing of Saudi Aramco could help increase MENA’s visibility to the outside world.

Playing the long game

Any investor looking to make a quick buck should not look at MENA, Tonna warned.

“MENA is not a short-term play. When you go in, you have to hold [your portfolio] for three to five years,” he said, adding that in an uncorrelated market like MENA, fund managers have an opportunity to pick the right stocks. “While MENA may not be a stock-picker’s paradise, active management still plays a crucial role here.”

Oueijan added that the region has “a very good track record” of active managers outperforming the regional benchmarks, on average. “Mainly that is because there are good managers out there, but also, the construction of the benchmarks here are not typical. Certain sectors, such as financials and petrochemicals dominate the benchmark, so you need to actively manage your portfolio [to manage] risks.”

Meanwhile, Bekkali said he does not expect the region to go the exchange-traded-fund (ETF) route.

“We would want to see big ETFs in this region, but don’t think that will happen,” he pointed out. “But the region makes sense for international investors. There's a valuation and bottom-up story, companies are more open-minded, and reforms are being put in place. There’s no better time than now to invest in this region.”