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Mena means business

Barings’ Ghadir Abu Leil-Cooper began her career as an analyst covering the Middle East and North African markets and returned to these roots for a Mena launch earlier this year.

She joined the group in 1997 and has played a key role in establishing Barings as a major player in emerging market investment, heading top-performing Eastern Europe and Russian portfolios.

Leil-Cooper’s strategy across all her funds is to seek growth at a reasonable price in the form of earnings’ surprises at attractive valuations.
“We take a long-term approach and review companies and countries on four key factors – growth, valuation, liquidity and management,” she says.

“If a particular country’s currency is expected to appreciate, for example, we would want more domestic exposure. If the currency is depreciating, exporters are best placed to benefit. As for management, better corporate governance typically feeds through into superior multiples and we weigh up all these factors to find the best risk-adjusted returns.”

Looking across Eastern Europe, her favoured markets are Russia and Turkey, with both expecting strong GDP growth this year against a fairly flat global background.

On Russia, she says the country has benefited from rallying commodity prices since the lows of 2009 but there is also a strong domestic recovery at play, seen in rising disposable income, infrastructure spending and growing loan demand.

“Russia is generally under-invested with huge pent-up demand and low penetration rates in areas such as car ownership and loans,” says Leil-Cooper. “These themes are long-term, suggesting the country will produce a stream of earnings’ surprises and yet Russia remains the cheapest emerging market.”

Russia makes up around 60 per cent of Barings’ Dublin-domiciled Eastern Europe fund. As for Turkey, the manager highlights an ideal combination of a young population with solid growth, little debt and, once again, low penetration rates in areas such as mortgages.

“In the past, Turkey has been seen as a boom/bust country but with interest rates so low and inflation under control, we are predicting major credit expansion and domestic demand growth,” she says.

“Turkey’s banks are among the most liquid and attractive in the world, with an average return on equity above 20 per cent but price/earnings ratios of under 10. The country is closer to the West than China and, with a growing reputation as a cheap manufacturing hub, stands to benefit from the recovery.”

Leil-Cooper says Turkish companies are also well run as they have typically had to navigate a background of very high interest rates.

Elsewhere, Barings holds various central European stocks in its portfolios, noting a strong macro-story in Poland, for example, and years of convergence towards Western penetration levels ahead.

As for the latest Mena launch, the group sees these as the next emerging markets to win widespread investor acceptance, highlighting the usual demographic, infrastructure spending and strong corporate, personal and government balance sheet arguments.

On the population side, for example, Leil-Cooper highlights huge growth in countries including Egypt and Turkey, with the overall Mena region to add a further two Egypt’s worth of people over the next two decades.

“This obviously promotes a strong domestic demand story across the region, with a young population increas-ingly wanting access to housing, education, cars and so on,” says Leil-Cooper.

“There are 500,000 to 600,000 marriages each year in Egypt, so if just a 10th of those couples need a mortgage, there is a strong underlying domestic story to this market.”

The infrastructure theme is also key for continued growth, with the Mena region deficient in areas such as housing, roads and schools.

“This means economic growth is supported by fixed capital formation and, more importantly, the Mena region can afford to build its own infrastructure – with several sovereign wealth funds investing – rather than having to rely on Western credit,” says Leil-Cooper.

“Frontier markets can be more volatile so suit a longer-term investment horizon but valuations are attractive after the sell-off in 2008, with the region trading at a discount to emerging markets but offering high return on equity.”

She says that many Dubai-listed companies suffered amid the debt issues last year but few have close ties to the local economy.


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