Emerging markets 2.0
INVESTORS have developed an addiction to emerging markets in recent years. But what happens when the traditional emerging economies of South East Asia start to mature? Where are the next fertile regions for growth? The frontier markets of the Middle East and North Africa, collectively known as the Mena region, are a good bet.
Frontier markets have many of the same attractions as emerging economies; for example, public finances are in good shape compared to the west (see chart), there are high levels of infrastructure spending and there is growing domestic demand. But one thing differentiates Mena states: demographics. Population growth across the region is expected to exceed 2-2.3 per cent per annum, says Ghadir Abu Leil-Cooper, Baring Asset Management’s head of Europe Middle East and Africa (EMEA). This is attractive relative to the developed world, but also relative to some emerging economies; for example, China, which has an aging population.
“There is a young and aspirational population in the Middle East,” says Mohammed Al Hashemi, head of asset management for Invest AD – formerly Abu Dhabi Investment Company. In the last five years, mobile phone penetration across the region has increased five-fold.
The next big growth area is banking services, says Abu Leil-Cooper. She invests almost half of her fund in the financial sector, with just over 20 per cent invested in industrials. “In Egypt, the mortgage market is virtually non-existent. This creates a very exciting opportunity for retail banking.”
Investors concerned about last year’s Dubai crisis can rest easy. Al Hashemi says that across the region lessons have been learnt from the crisis: “Every emerging market needs to go through these crises. It has actually helped investors since it has shown the need for tighter corporate governance and transparency.”
So where are the most attractive investment opportunities? Abu Leil-Cooper invests nearly half of her fund in Egypt and the United Arab Emirates. While investors may be more comfortable with the oil-producing states such as Abu Dhabi, Qatar, Saudi Arabia and Kuwait, they should not ignore the oil importers. Al Hashemi says that non-oil producing nations in the region also benefit from petrodollars through greater levels of investment. “This wealth filters through to the neighbouring countries, for example, Jordan, Lebanon and Syria.”
Fund performance across the region is also impressive. Year-to-date HSBC’s GIF Middle East and North Africa equity fund has posted a return of 8.14 per cent according to Morningstar, the fund research provider. JP Morgan’s Emerging Middle East equity fund has returned just over 14 per cent since the start of this year.
If emerging markets are the Holy Grail for investors, don’t ignore the Middle East.