The latest company to announce the launch of a Mena fund, following SocGen, Barings, Franklin Templeton, Pictet and Investec, is HSBC Global Asset Management.
Mena funds cover the oil-rich region which spans Kuwait, Saudi Arabia, Bahrain, the United Arab Emirates and Oman, as well as Egypt, Jordan, Qatar, Lebanon, Morocco, and Tunisia. Why has there been this sudden interest in regions which have historically suffered from political instability and volatile markets?
Andrea Nannini, who will manage the HSBC fund, says: “These markets are expected to benefit from continued rapid economic growth and increasing liberalisation of financial markets. Many of these countries are positioned to benefit from high and sustained commodity prices, in particular those within the Gulf region. Additionally, ambitious infrastructure development programmes are underway within the region, which provides an exciting investment theme.”
SocGen Mena fund manager Mark Krombas says: “If you think about the world today, where is the growth? Look at the Middle East. There is huge redistribution of wealth from oil-poor countries to oil-rich countries which is changing the infrastructure of these regions. People want to play on that theme.”
SocGen launched its Luxemburg-based Mena fund in May but has an 11-year history of investing in this region and Krombas says it is well placed to take advantage of the opportunities. With Western markets looking fragile, he says the Middle East is very attractive and this has led to other fund firms jumping on the bandwagon.
Krombas predicts that the Mena region will become a similar success story to Eastern Europe and says Saudi Arabia opening up its stockmarket to foreign investors in August was an important development.
However, he says people are holding on to their cash at the moment and the fund has been seeing redemptions rather than subscriptions.
“It is difficult to get anyone to invest outside their mattress at present. There is very little liquidity in this environment but now is a great entry point into this region. Now is the time for a clear head and a time to stick to fundamentals. I think people should look at it because the risk return is attractive,” says Krombas.
Barings has launched a Mena fund under head of emerging Europe, Middle East and Africa equities Dr Ghadir Abu Leil-Cooper.
Leil-Cooper agrees with Krombas that risk appetite is very low at the moment among UK investors.
She says: “If you are worried about your deposits in a UK bank, chances are that you would not want to put your money in an esoteric market. If I thought of the investment case for the next few months, we would not have been launching. The idea is that we are going to get returns in proportion to the risk we are taking. We would never contemplate jumping on the bandwagon of something that has the longevity of a few months.”
She says investing in any emerging economy is a high-risk strategy and she would not advocate the Mena fund for everybody. “It is a high-risk, high-return proposition. Most of the time when you get more value added is when you make a change from bad to better. If you think the Middle East is really bad and has authoritarian regimes, and so on, but you think there is a chance of that getting better, that is when you actually improve your return.”
Wilson Dean Financial Services director Nick Lincoln thinks the launch of these types of funds is a marketing gimmick. He says: “They are so esoteric that we do not really use them. A great concern is that fiduciary requirements in these countries might not be up to scratch. There is also the threat of the government coming in and nationalising those companies. How liquid and efficient is the market?”
Leil-Cooper says the investment story in these regions hangs together more than simply as an acronym. She says: “What we are looking for in these countries is a young population, an ability to stimulate growth by the government, current accounts and budgets in surplus and this is what the Middle East and North Africa have in common. Why North Africa? Well, Algeria and Libya have the high oil prices as well and Egypt has the ability to finance itself.”
Hargreaves Lansdown senior analyst Meera Patel says it is not recommending any Mena funds at present.
She says: “They are on our radar. We are not saying we will never recommend them but right now, with markets the way they are, we want to see a suitable return before taking on any of these funds. What makes it interesting is the infrastructure story. These guys are dwarfing India and China in terms of the amount of money they are pouring into development.”
An advantage of the region is the ability to stimulate the domestic economy through infrastructure spending which does not need outside investment, says Leil-Cooper. What about concerns that the Mena region is too dependent on oil prices?
Krombas says it does have a bearing but the region is not as sensitive to oil prices as people seem to think.
“Certainly, they have a massive dependence on oil but they have built up big savings for a rainy day and it is only when oil drops to $40 a barrel that it presents problems. At the moment, oil prices are still around the $100 a barrel mark,” he says.
Krombas believes that competition in the region will be much more intense in the next couple of years and predicts that more fund firms will enter the fray. He says: “If you look around for asset classes where you have seen net inflows this year, the Middle East is one which stands out. There is great long-term potential.”