Oil and gas revenues are not the whole story. As regional economies have developed, so financial services, real estate and tourism have experienced strong growth while infrastructure spending is at record levels. This is a profitable environment but until recently many countries had strict limits on foreign investment in listed companies. However, the last few years have seen considerable changes, with a succession of reforms helping to open up markets.
Investing in the Middle East and North Africa is not without risk. Markets have historically been volatile and liquidity remains low compared with developed markets. Political risk is another factor but we believe the region offers an attractive combination of strong economic growth and positive structural change in a world where many developed economies may be heading for recession.
Eight markets are included in the MSCI Arabian Markets ex Saudi Arabia index – Kuwait, United Arab Emirates, Qatar, Bahrain, Oman and Jordan in the Middle East plus Egypt and Morocco in North Africa.
Kuwait has benefited from substantial oil reserves but other areas are booming, such as construction and financial services. The UAE is the centre of trade and finance in the region, with Dubai leading the way in real estate, services and tourism.
Qatar has the highest GDP per capita in the world, as the biggest exporter of liquefied natural gas. Growth areas include financial services, petrochemicals, construction, trade and tourism. The theme of diversification holds true for Bahrain. It might be the smallest Mena country but limited hydrocarbon reserves have encouraged a variety of businesses to develop, led by the banking sector.
Oman is less well endowed with oil and gas than its neighbours but has plans to develop its tourist industry and has successfully embarked on a programme of market-friendly reforms.
Finally, Jordan’s resource is its people. Repatriation of funds from Jordanians working around the region and revenues from tourism have boosted growth, as have revenues from production of phosphates for fertiliser.
The main beneficiaries of the strength in the oil price in recent years are in the Middle East but there are benefits for neighbouring economies in North Africa.
Egypt has seen a high level of investment from the Gulf countries into the telecoms, banking and real estate sectors while demand for skilled labour in the Arabian Gulf has acted as a magnet for workers in Egypt and Morocco, two of the region’s most populous countries.
Not everything is tied to the worldwide demand for oil. Tourism is an important and growing source of revenue for both countries while phosphate mining is important for Morocco.
We believe that having access to the markets in North Africa gives valuable room for diversification.
The most notable feature of the Mena equity markets is the lack of a meaningful energy sector. All the major oil and gas producers are government-owned. The biggest sector overall is financials, including real estate developers, but other important areas include materials, telecoms, industrials, healthcare and consumer discretionary.
The relatively domestic focus of the equity markets has meant that the Mena region has offered investors an excellent source of diversification compared with other emerging markets. This is gradually changing as these markets open up but they still have a relatively low correlation with other markets.
Investment themes which have particular promise include infrastructure, banking, including Islamic banking, property and consumption – a small part of the listed market currently but we expect further growth in this attractive segment.
Ian Pascal is marketing director at Baring Asset Management