Pictet & Cie, a leading global private bank with assets under management and custody totaling $384 billion, on Saturday released a report on investing in the Middle East and North Africa region, entitled “Time to Revisit MENA.”
Based on the latest MSCI EM and MSCI Arabia figures, the report sheds light on current market performance, challenges and opportunities in the MENA region.
“The MENA markets have considerably lagged the strong overall returns seen in the MSCI EM index since the low point of October 2008. The aftershocks of the financial crisis, notably Dubai World’s debt problems, particularly undermined returns in 2009, when the MENA index rose by just 13 percent against a 75 percent gain in the broader EM market,” said Oliver Bell, senior investment manager at Pictet Asset Management, while commenting on the report.
The report estimates the Gulf region’s revenue to be around $750 billion, as key country budgets have assumed a $50-55 per barrel oil price in 2010, with the actual price averaging some $77 so far this year.
Fiscal and current account surpluses have been significant characteristics of the regional economy over the past eight years as government spending on projects has lagged the oil-driven revenue flows to cover increasing demand in many areas.
Such infrastructure investments are substantially underwritten by the scale of the Sovereign Wealth Funds (SWF) that have been established to cushion the effects of any future declines in oil price.
In the UAE, SWF is equivalent to over 300 percent of GDP, in Kuwait it is equal to 158 percent and in Saudi Arabia it makes up 100 percent of GDP.
Fiscal spending has largely been self-financed through hydrocarbon revenues, and government to gross-debt levels in the GCC countries runs at some 12 percent of GDP, this compares to 36 percent in the emerging economies as a whole and is in excess of 100 percent within advanced economies. This enables long-term spending plans to be maintained notwithstanding shorter-term fluctuations in funding flows.
The recent underperformance by the MENA region has left it looking low-priced compared to most other emerging markets and also relative to its own historical valuation ranges. This relative undervaluation does not look consistent with the generally superior earnings outlook that characterizes many of the constituent countries.
Additionally, investors are exposed to little local currency risk, given that most countries maintain a peg to the US dollar. The prospects for improved returns within the region have recently been buoyed by indications that risk appetite is returning to Dubai.
“Such successful capital raising is regarded as an important bellwether of investor confidence which, in conjunction with the evident value available within the region, should ultimately support the underlying equity market.
“We remain optimistic regarding the outlook for the MENA region and have recently established an initial investment, as an off-benchmark position, within GEM portfolios. The UAE entered the FTSE Emerging Market index in September and we anticipate that in due course, the MSCI EM Index will include exposure to countries within the MENA region,” Bell added.
