Global uncertainty could be an opportunity for the MENA region, as its fundamental strengths become a magnet for international investors' attention.
As developed markets face indebtedness, lack of growth catalysts across their economies and no other alternative but slower austerity, their attractions are falling. Even emerging market prospects are slowing and securities are more expensive nowadays than in the past, so confidence in Asia decoupling is falling. The lack of attractions of traditional solutions should benefit MENA mutual funds in the fixed income and equity sectors. The scale of subscriptions for Middle East bonds in recent weeks is a demonstration of the appetite for secure credits.
Current global imbalances stemming from the euro crisis, inflationary pressures in Asia and slowing economies, and a petering recovery in America are creating headaches for global asset allocators. The investment challenges rise even more when considering fair valuations, shifting earnings forecasts and record lows in yields.
Despite the positive signals, the MENA mutual fund sector faces challenges of viability, with some of the smaller investment products being liquidated, with consolidation quickening.
Local strength
Some important fundamental measures show a positive signal for the MENA region. A recurring worry for many investors has been bank strength and liquidity. An analysis by Standard and Poor's shows Middle East banks are better capitalized than their counterparts in other regions (see chart). S&P's Risk-Adjusted Capital (RAC) framework ratio provides a globally consistent and independent view of capital adequacy for rated financial institutions.
The average RAC ratio for Middle East banks is in the 12%-13% region as of 31 December 2011. This is 5% higher than the 7.4% S&P projected for the 100 largest rated banks as of 30 September 2011. The fact that these strong counterparties exist is one pillar supporting the MENA region to grab attention once again from international investors.
Demand for secure credits
In the past couple of weeks, the demand for Middle Eastern bonds has been significant. The new issue pipeline has been very healthy with three major issuers coming to the market:
> EIB raised USD 500 million of a five-year sukuk at 4.147%, which was 10 times oversubscribed
> Qatar sold USD 2 billion of sukuk maturing in five years and another USD 2 billion maturing in 10 years. The fiveyear sukuk was priced at 2.2% and the 10year came in at 3.24%. The USD 4 billion sale attracted over USD 25 billion of orders, from bothregional and international players.
> Following on Qatar's heels, Emaar launched a USD 500 million sevenyear sukuk yielding 6.4%, which resulted in an order book of USD 4.5 billion.
All of these new issues have tightened the secondary market, due to the excess liquidity currently available following on from the recent JAFZA, DIFC and Dar Al Arkan redemptions.
Equities have not seen the same level of excitement as bonds, despite companies experiencing growth, positive corporate health and undemanding valuations. A return ofrisk appetite and confidence is needed for equities to build on the current strong foundations.
2012 consolidation
There has been a consolidation in the MENA mutual fund sector this year. This is the counterbalance to a positive fundamental story. Typically, the funds that have been liquidated have been small, with one or two dominant investors. The funds are no longer viable products to manage, rather than being disappointing on the performance front.
As the asset management sector builds around a few solid investment groups, the industry should become more sophisticated. Local groups face an increasing opportunity, as the stronger ones will lead and operate to international standards which should attract more discerning investors.
Already, local asset managers are building good track records, adopting an investment process that foreign investors are comfortable with. We believe investors will start to favor local groups over mainstream global fund houses or foreign boutiques in the future for their MENA exposure.
Investment infrastructure and operational processes are reaching international standards across the Gulf, so this will reduce the perceived risks of using a local manager. As a result, MENA fund managers' local knowledge will help to reach a greater international audience.
On balance, we believe there is a good growth opportunity for MENA fund managers in international markets. The fundamentals are attractive, foreign markets have big weights on their shoulders and consolidation will help the strong local institutions to build on their strengths. The long game looks exciting for MENA managers able to navigate the current overseas challenges.
Lawrie Chandler is head of Europe, asset management, at Emirates NBD bank.
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