Emerging Markets  

Fund Review: Mena provides ‘wide range of credit quality’

Fund Review: Mena provides ‘wide range of credit quality’
 Performance of Mena region versus global markets in the past 12 months

With emerging markets having enjoyed a resurgence in recent months, it can be tempting for investors to allocate to the area without too much further thought. 

But as a very diverse range of countries, emerging and frontier markets require more scrutiny on what has performed well and which areas have suffered. The Middle East and North Africa (Mena) region, for example, can be tricky to drill down into given the variety of markets covered. 

MSCI offers the MSCI Arabian Markets index, which covers Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia and the United Arab Emirates (UAE), while the FTSE Middle East and Africa index, focuses on large and mid caps in Egypt, Israel, Morocco, South Africa and the UAE. 

Therefore, in terms of performance the results depend on how you invest. For the 12 months to March 24 2017, the MSCI Emerging Markets index gained 38 per cent in sterling terms, just ahead of the MSCI Arabian Markets and Africa benchmark’s rise of 34.2 per cent, data from FE Analytics shows.

The S&P 500 index delivered the same as the FTSE Middle East and Africa, with a gain of 32.3 per cent, while the MSCI Arabian Markets index rose just 27.6 per cent, behind the MSCI World’s increase of 31.5 per cent. 

While the headline equity numbers tell one story, investors can often find another by digging deeper. This is more so the case when looking at credit. 

Claudia Calich, manager of the M&G Emerging Markets Bond fund, says: “There is a wide range of credit quality to choose from within the Mena region, ranging from highly rated credits such as Kuwait, all the way to weaker ones such as Iraq, oil importers like Morocco, to exporters in the Gulf Cooperation Council area. 

“The oil exporters in the Mena region should become a larger part of the emerging market debt universe as they face the need of foreign funding to help cover their large fiscal deficits given the decline in oil prices. 

“Ultimately, their ability to service their debt will hinge on how successful they are in diversifying their economies away from oil.”

The Mena region has suffered in recent years as a result of the unstable geopolitical climate in many countries, but Ms Calich notes she recently bought Moroccan sovereign bonds as the credit was attractively valued given its improving fundamentals, and “has the potential to be upgraded to investment grade as it is currently split-rated”. 

Meanwhile, Carlos Hardenberg, lead portfolio manager of the Templeton Emerging Markets Investment Trust, suggests: “The landscape of emerging-market corporations in general has undergone a significant transformation from the often plain-vanilla business models of the past, to a new generation of very innovative companies that are moving into technology and much higher value-added production processes.”

But he adds: “Emerging markets tend to have their own business rules and regulations, which affect companies, governance standards vary significantly and local intricacies determine consumer trends and habits. These factors could be an important consideration.”