Introduction
The three-year performance of the MSCI Emerging Markets index is a disappointing fall of 16.6 per cent to March 10 2016, while the MSCI Frontier Markets index made a respectable gain of 9.8 per cent, data from FE Analytics shows. In the same period the FO Equity – Mena sector returned an average of 7.6 per cent, while the MSCI GCC Countries excluding Saudi Arabia index gained 14.7 per cent.
Fadi Al Said, manager of the Lazard Mena Equity fund, notes that in 2015 the Mena region got off to a strong start fuelled mainly by technical factors, such as the opening up of the Saudi Arabian market for foreign direct investment and MSCI’s inclusion of certain stocks in its Emerging Markets index.
He says: “The region also benefited from offering a relative currency safe haven when compared with other volatile emerging market currencies that witnessed major losses in 2015. These factors led Mena markets to reach a peak in May, with positive returns of 10 per cent in US dollar terms.”
But with the Saudi market failing to attract the expected level of inflows, the premium valuation of certain regional markets, and concerns over the sustainability of government spending given the fall in the price of oil, Mena markets “gave away most of the gains achieved at the beginning of the year to close in the red, dropping by 15 per cent”.
| THE PICKS |
Franklin Mena Managed by Stephen Dover, Bassel Khatoun, Purav Jhaveri and Salah Shamma, this $108m (£75m) fund aims to achieve long-term capital appreciation by investing primarily in the equity securities of companies across the entire market-cap spectrum in the Mena region, including Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia and the United Arab Emirates. The vehicle has delivered a respectable 38.5 per cent over five years, while the three-year performance of 20.1 per cent places it in the top quartile of the FO Equity – Mena sector. JPM Emerging Middle East Equity This $100m Luxembourg-based Sicav launched in 1998 and is managed by Habib Saikaly and Oleg Biryulyov. It aims to provide long-term capital growth by investing in emerging market companies of the Middle East region. However, the fund notes that because of the high volatility of the region’s stockmarkets, “investors should also have a five- to 10-year investment horizon”. The vehicle has generated consistent performance across the medium and long term, with its 54.2 per cent 10-year return supported by 50.9 per cent over three years. The portfolio’s largest country weighting is to Turkey at 35.3 per cent, while financials account for 57.3 per cent. EDITOR’S PICK Charlemagne Magna Mena Akhilesh Baveja and his team manage this strategy, which aims to achieve capital growth by investing in a diversified portfolio of Mena securities. The team focuses on stockpicking, with a relatively concentrated portfolio of between 30 and 50 holdings. The fund delivered a strong 113 per cent return for the five years to March 10 2016, and an equally impressive 73.3 per cent over three years. The Dublin-domiciled Ucits fund has roughly ¤19m (£14.7m) of assets under management, while the largest country weighting is to Saudi Arabia at around 45 per cent, as of January 2016. |
With oil prices looking set to remain at lower levels and geopolitical uncertainty in many parts of the region, what is the outlook for these markets?
Antoon de Klerk, portfolio manager at Investec Asset Management, says: “Over the past few years the sentiment towards emerging markets has clearly turned negative and African economies have not been spared the ensuing rout. Hardest hit in Africa have been those economies that are still heavily reliant on commodities, including Angola, Zambia and Nigeria.
“We see little in current global macro data and market trends to believe the situation is about to change soon. Going into this challenging period, the majority of African economies are in somewhat precarious positions.
“Particularly worrying is the fact that several are hampered by large twin deficits [fiscal and current account], which have largely been the result of strong growth in government spending over the past decade.”
But there are some bright spots on the horizon, according to Oliver Bell, manager of the T Rowe Price Middle East and Africa Equity fund.
Mr Bell notes: “Aside from the oil price, the Middle East and African region is benefiting from attractive demographics, rising urbanisation and levels of infrastructure investment.
“While many emerging markets are undergoing a growth slowdown, there are countries in this region that are continuing to grow at high rates, driven by structural domestic demand.”
With traditional emerging markets expected to continue to struggle with China’s transition, those willing to take the risk and look beyond the larger markets could find some interesting opportunities.
