By Fadi Al Said
MENA economies are among the richest and fastest growing in the emerging world and growth is not just driven by the oil profits of a small percentage of the population, but by the increased spending power of governments and citizens. This allows for wider participation in broader economies, calling on the services of the many sectors that create the diversity a successful equity market demands.
Ironically, governments have succeeded in liberating themselves from a reliance on oil through rising oil profits during the past decade. Higher oil prices in recent years have allowed governments to build budget surpluses and pay off debts. This has led to a steady increase in spending and this spending comes with a high level of visibility. These economies are in a transitional period, with an increasing amount of accountability built into their systems, as regimes hidden behind closed doors increasingly become open-market economies.
Money has pervaded a number of sectors over recent years, with capital more readily available for start-up businesses, housing and education, in addition to large infrastructure investments. The latter is likely to be sustained by Dubai’s successful bid to host the 2020 World Expo and Qatar’s hosting of the FIFA World Cup in 2022. There are also strong signs in MENA countries of revenue increasingly coming from other parts of the economy. The MENA region’s correlation with Brent oil has broken down over a five-year period. The ensuing diversification has made the region less of a risk to investors’ portfolios than it would have been only 10 years ago. Oil-related growth in the Gulf Cooperation Council (GCC) countries, which are made up of Kuwait, Saudi Arabia, the UAE, Oman, Bahrain and Qatar, was only 0.9% in 2013 and is expected to drop to 0.4% in 2014, while growth not including oil is expected to grow from 5.4% in 2013 to 5.7% in 2014.
Concerns over the sustainability of investment have been raised following the fall in oil prices towards the end of 2014. However, we are now at a stage where even if oil fell to US$30 per barrel in Saudi Arabia, current spending could be sustained using assets accumulated by the Saudi Wealth Fund. Similar financial reserves exist across the MENA region and have become increasingly important in the face of sustained oil-price declines towards the end of 2014. In addition, post-Arab Spring, there is no turning back from the promises made by MENA governments to address growing calls both for investment in once underfunded sectors, such as education and health care, and to alleviate various economic and social challenges.
MENA countries are also at different stages of openness regarding outside investment and transparency, and it is encouraging to see acceleration in their drive to be established in the open market, even if they are all starting from different positions. The more markets open up, the more foreign institutional investors will commit capital, and the more companies will practice better governance. Open markets are scrutinised and that means transparency and reform, which we have seen across MENA in recent years. We saw the UAE and Qatar upgraded to emerging market status by MSCI in June 2013, opening the countries exchanges to global investment. Once in the MSCI index, passive funds will be obliged to invest and many active managers will commit capital too. In June 2014, it was also announced by the Saudi Arabian Capital Markets Authority that the country’s equity market will be opened up to foreign investors in the first half of 2015.
As markets open up, what does MENA offer equity investors that the more established emerging markets do not? The MENA region, with the exceptions of Morocco and Egypt, benefits from a lack of currency risk, something which has caused a great amount of strain in other regions of the emerging markets universe. The majority of MENA currencies are pegged to the dollar, reducing FX risk considerably for investors comfortable with US dollar exposure. We have seen extraordinary bouts of volatility in Asian and Latin American markets and MENA equities being pegged to the US dollar shelters the region from such currency storms, offering risk/return benefits versus other emerging markets.
Also, unlike much of the emerging world, generous dividends have become an attractive attribute of MENA equities and offer a counterpoint to low interest rates and static or falling yields in the developed world. A culture of high dividends should provide some shelter from falling equity prices for those harbouring concerns that further geopolitical tensions in the region could adversely affect share prices. MENA companies are focusing on increasing their annual dividend to shareholders, something which should encourage investors to reconsider the region if they are under any illusions about the stability or maturity of MENA companies, as dividend paying companies tend to be stable enterprises with sustainable cash flows.
The exciting changes taking place across the region point to a bright future for investors, as economies commit large amounts of capital to driving growth, while the emergence of an increasingly educated, middle class population signals a key change in spending habits. The evolution of MENA is one of the most compelling investment stories around and hands a bold invitation to investors who wish to allocate to a sometimes misunderstood, but increasingly prosperous market.
Fadi Al Said is manager of Lazard’s MENA strategy
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