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Feb 03 2013

Risk aversion takes new spin in MENA

By David Marshall of Emirates NBD Asset Management Risk aversion takes new spin in MENA
The past five years have witnessed dramatic changes in investors' risk appetite and the consequent choices they have made when pursuing and allocating towards fund-based investments.

In 2007 we witnessed a bias towards risk-based assets, which changed significantly with the advent of the global financial crisis in Q2 2008. Since then, and despite significant improvement in the region's economic fundamentals, investors have largely shied away from risk taking and have sought refuge in cash, near cash or fixed income instruments.

The trend shows little signs of abating, but this may not be an option based on our market outlook. We believe the following factors will be the key drivers that will influence investor behavior at the current time:

  1. Interest and profit rates will stay lower for longer than investors currently expect.
  2. An improvement in the liquidity positions of regional banks will reduce funding costs, and therefore the rates that will be available for the most risk averse.
  3. Regional equity valuations remain cheap when compared to developed and emerging markets on most measures.

The search for a high and sustainable level of income will likely persist, even while funds continue to pour into regional debt markets.

As a result, we are seeing nascent signs of a move towards equity income strategies and real estate. We believe this is a shift in investor sentiment and a sign of a maturing market. Moreover, investors looking for assets that are cyclically late out of an economic downturn are likely to be rewarded for their contrarian behavior in our opinion.

The challenge is seeking to draw investors away from investments that have performed exceptionally well on a risk-adjusted basis over the last 12-24 months. Most clients, over this time, have focused on fixed income in the MENA region, as issues with attractive coupon rates plus the added potential of capital appreciation, were the flavor of the month.

The fixed income market benefited from the mispricing of MENA issuers when compared to their international peers, and investors reaped the rewards. However, this situation is likely to change, as spreads continue to tighten, and as such, investors need to look for the next asset class to provide them with both income and growth.

The next step in this search for returns is to look towards income paying strategies, in both the equity and real estate asset classes. Emirates NBD Asset Management manages funds in both these areas, and we are starting to see renewed interest from investors, a situation which bodes well for 2013. The equity income strategy looks to invest in the high dividend paying stocks in the region, of which there are plenty.

Strong regional economic fundamentals as well as a wealth of companies with robust earnings makes this possible, so with the reduction in bond yields, investors will start to look a little higher up the risk curve, yet staying within their comfort zone of the MENA world. Average dividend yields in the MENA region are just short of 5%, which compares well to bond yields.



Even real estate, which up until the middle of last year had investors still spooked, is now picking up, with decent growth being registered, especially in markets such as Dubai. Our current portfolio is yielding 8% on an unlevered basis and despite the recent downturn, we have now seen five consecutive quarters of NAV growth.

Since the financial crisis of 2008, the MENA region, and in particular equity and real estate markets, took a severe beating. Events of the Arab Spring and the continuing political unrest in the region also continued to dampen investor sentiment. Fixed income has already seen a strong recovery, with impressive performance over the past two years.

Going forward in 2013, our belief is that investors will need to branch out of the 'safer' areas of cash and fixed income, in order to maintain the high income levels to which they have become accustomed, as well as ensuring that the 'real' value of their capital is maintained.

This year should see the resurgence of interest in both the equity and real estate markets, which would really set the MENA region back on the radar screen of both regional and international investors alike.

David Marshall is the senior executive officer of Emirates NBD Asset Management and director of Emirates NBD Fund Managers (Jersey) Limited, Emirates Funds Limited and Emirates Portfolio Management PCC.

© Zawya 2013


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