Middle Eastern funds offer long term promise

WHEN it comes to investing in emerging markets, few might choose the Middle East and North Africa over the opportunities offered by Asian powerhouses such as China and India. Not only are political tensions continuing to concern investors, the near-collapse of overstretched Dubai and the bailout by its neighbour Abu Dhabi is still fresh in people’s minds.

But for individuals looking to diversify their portfolios and add a bit of spice to their investments, the Mena region – as it is known – could provide plenty of opportunities for long-term growth in this very heterogeneous region that is about far more than oil and gas.

Baring Asset Management is choosing to capitalise on these prospects by launching its own Mena fund this month, giving both institutional and experienced retail investors the opportunity to gain exposure to this market. The fund, which will be launched on 15 March, will invest in between 20 and 50 stocks in the Middle East and North Africa with Turkey, Egypt and Saudi Arabia being particular favourites of the management team.

So why should investors be looking at the region now? According to Baring, “the recent fall in Mena markets provides an excellent tactical investment opportunity to participate in the long-term growth prospects of the region at a lower entry level”. There are three strands to the Mena investment case.

First, one thing that does unite such a diverse set of countries is the demographic structure. Compared to Western nations, Middle Eastern countries have young populations that are expected to grow rapidly – perhaps by as much as 40 per cent over the next decade.

As the population increases, governments will have to build the infrastructure required. For this reason, Baring is positive on telecom companies proposing to hold both Telecom Egypt and Qatar Telecom. An expanding middle class will also effect a shift in consumption that should drive growth in a range of sectors.

Second, many of the countries also have large oil and gas reserves – PennEnergy estimates that they have about 60 per cent of the world’s total oil reserves and 45 per cent of the gas reserves – so they should do well as commodity prices rebound. They are some of the lowest cost oil producers in the world, which means that they are more resilient to a lower oil price should this scenario arise.

But a number of states, including Egypt and Morocco, are diversifying their economies towards tourism, manufacturing and agriculture, making them a much safer prospect.

Finally, the equity markets in the region are in the early stages of development and have only recently started opening up to foreign investors. While this may cause some concerns about liquidity, investing in the region through an exchange-traded fund or an investment fund will alleviate some of these concerns.

But the lack of transparency in some markets means that an investment fund – where managers’ stock picking ability should provide added value over time – might be a better choice.

The region is still relatively unknown but those investors that get in early will reap the greatest profits as it develops and opens up to the rest of the world.