14.11.2009

Mujib Moosa - MBA finance (Poona University, India), started his career in 1994 working for the Economic Times, an Indian financial newspaper where he covered several sectors. In 1998, he moved to Fincorp in Oman where he was a sell-side research analyst for three years, before joining Markaz's asset management division in January 2004.

MIDDLE EAST REGION AND ITS CAPITAL MARKETS

Countries within the Middle East (ME) region are considered as emerging or even frontier markets. How can you characterize this region especially its capital markets?

Countries in the Middle East region are largely categorized under frontier markets, with measures like capital market reforms, corporate governance and improved regulatory environment still in an evolving phase for the region. Crude Oil revenues is the major driver of the region’s economy, accounting for 80-90 % of the total revenues earned by governments in the region. Non-oil economic sectors accounts for around 50-60 % of the region’s gross GDP and is to a large extent dependent on fiscal spending by the governments. Businesses in the region are largely owned by the governments and business families, with immense potential being foreseen for the corporate sector to further expand through privatization. Although stock markets in the region have been in existence since early 1990s, the acceleration of growth has happened over the past 10 years with an expanding breadth of listed companies and increased trading activity. Stock markets in the Middle East region are characterized by extreme volatilities with retail investors accounting for more than 60-70 % of the daily trading activity on the Middle East stock markets. In recent years, institutional investors’ presence is also fast growing with participation from foreign institutions too. The Debt market is also becoming active in the region through growing interest from institutional investors in government and corporate debt issuances, but needs support from an active secondary debt market which is still in its early stages.

What is the approximate market capitalization of the main ME Stock Exchanges?

MENA countries

(most active)

Stock mkt Cap  (USD billion)

Saudi Arabia

329

Kuwait

105

Abu Dhabi

85

Dubai

44

Qatar

56

Egypt

53

 

When constituting the fund portfolio are you primarily focused on the most liquid blue chip companies within the Arab Stock Markets or are you also looking for some unrevealed opportunities inside the Markets?

The Fund has a primary investing focus on the actively traded blue chip companies in the region, but does seek compelling investment opportunities in the active mid-cap segment too.

Your investment approach is not benchmark driven but is to achieve absolute defined return. This may imply many pros and cons when comparing to benchmark driven funds. How do you implement your strategy and what are your primary criteria when looking for a good investment? Does your investment style incline to a bottom up or top down strategy?

From the investment objective of generating absolute kind returns for the Fund, our strategy is to seek the best investing opportunities in all of the actively traded Middle East/ Arab markets that includes Saudi Arabia, Kuwait, UAE, Qatar and Egypt. The macro-economic assessment and risk-return trade-offs for investing opportunities in equities in all of these target markets are evaluated to accordingly decide on the right mix of country allocation. Depending on the varying cycles in the stock markets, the country allocation changes can be subject to short investing time horizons. Having screened for market capitalization and adequate trading liquidity in the stock, the key criterion for stock selection includes the sustainability of the business model to capitalize growth opportunities and relative attractiveness of stocks’ forward-looking valuation indicators. Short-term trading strategy and active portfolio churning for a portion of the Fund’s assets is emphasized with the objective to capitalize on making profits on the extreme volatilities in share prices, a typical characteristic of Middle East stock markets. As hedging instruments are not available on the region’s stock markets, the only effective means with us to minimize downside portfolio risk is through actively managing the allocation between equities and cash.

You have been recently acknowledged with an “A” rating from Standard & Poor´s which is one of the world’s most respectable rating agencies for one of your investment schemes focused on the ME region. What is your professional experience with the ME markets?

After having worked in India from 1994 to 1997, I moved to the GCC region in 1998 and my first stint was with The Financial Corporation in Oman where I was a sell-side research analyst till December 2005. I then joined Markaz's Asset Management division in January 2004 as an Investment Analyst and later on moved to the position of Investment Manager in December 2005 with primary responsibility to manage client funds and portfolios invested on the GCC region stock markets. I have been actively managing the Markaz Gulf Fund, an open-ended equity fund that invests in the GCC region stock markets, since its inception in January 2006. Total AUM that I currently manage on the MENA region equity markets is around USD 50 million.

STABILITY IN THE REGION

Stability in the ME region is the prime focus of the western world which is highly dependent on Arab crude oil. Countries such as Iraq, Iran or Israel are possible sources of tension in the region. How do you perceive stability in this region and its effect on ME capital markets?

Serious concerns on political instability in the Middle East region has for several years revolved around Iraq, Iran and with its GCC neighboring countries and long standing Israel-Arab conflicts. There are also the issues of monarchy succession which has occasionally raised concerns in the GCC world, but these have not assumed any serious magnitude to threaten political instability. There is a reasonable extent of political stability in the GCC and wider Middle East region. We believe that the political situation in Iraq is being gradually restored to stability. Iran is currently the most contentious issue for the region and world leaders on the issue of divisive opinions about the intent of the country’s ongoing efforts to develop nuclear energy capabilities. Fears of escalation into a war with Iran ran high in recent years, but renewed diplomatic talks by the new US political administration with Iran is seen as paving the way for a peaceful resolution to this intensely debated issue. The political conflicts between Israel and its Arab neighboring countries has not been resolved for decades, but the political dialogue has always been an ongoing process. Despite these political conflicts, the region’s economy has continued to grow on the back of increasing government and private sector investments in key economic sectors like oil and gas and downstream industries, infrastructure, real estate, trading and service-oriented sectors. The prospects for continued economic growth and growing appetite for FDI investments into the Middle East region is being reflected on the reduced risk premiums now placed on the region’s equity and debt markets this year. The trends of the past few years and current sentiment amongst investors’ in the region underlines our view that the above discussed political issues has not been a major deterrent factor to weigh on the region’s capital markets. Outlook on crude oil revenues, governments’ active role in fiscal spending policies and thus stimulating economic growth, political and economic reforms takes much more precedence over concerns of political stability.

Most of the ME countries are not ruled by a parliamentary democracy but the government is often constituted as a monarchy. How does this observation actually affect business matters in this region?

Monarchy regimes are inherent in the region’s culture and tradition, with family dynasties having ruled several countries in the Arab world for decades. The stability of these ruling regimes and smooth transition of succession in leadership within the monarchy system has helped the business climate in the region to remain conducive to growth through the past few decades. Economic policies and legislations are formulated by a council of ministers who are appointed by the country’s ruler. A broad framework of laws and regulations governing businesses are in place and authority vested largely with the ministries of Commerce, Industry and Finance. Businesses have to comply with the stipulated framework of laws and regulations and they do receive adequate support from governments functioning under these monarchy regimes. Most monarchies in the region have emphasized a gradual process of liberalization, economic reforms and to encourage more foreign investments into the region.

THE CRISIS AND MACRO ISSUES

The ME economies especially the GCC countries have large surpluses within their fiscal budgets which is considered by some experts as one of the roots leading to excess liquidity and inflated prices. Don’t you think that they need to more strictly adapt structural reforms in order to strengthen their macro-financial stability?

Governments across GCC countries have been taking active initiatives to diversify their revenue stream away from crude oil exports and make strategic investments in downstream oil & gas industries and non-oil economic sectors. Governments have been supportive of privatizing some government owned businesses and encouraging the private sector to invest in several non-oil economic sectors. Economic and financial sector reforms have been proposed, but the process is expected to happen at a steady pace as there are several political considerations in the implementation of these reforms.

We can agree that a major part of the ME countries have their income transferred from vast oil resources which proven to be 60% of the world reserves. However governments understand that dependency on oil revenues could be risky as the oil reserves are not endless. Could you provide any light on which areas of the economy that governments are developing when talking about the future?

Cheaper cost of producing oil gives the natural cost advantage for crude oil producers in the GCC region to diversify into downstream oil & gas industries like petrochemicals, fertilizers and related industries. Infrastructure within the region is still in need of further investments and governments has been pumping money into critical sectors like civil works, roadways, seaports and airports to also support businesses like trading which is a critical economic activity across the Middle East region. Establishment of financial centers in Dubai, Qatar and Bahrain underlines these governments’ efforts to attract foreign capital into the region while the establishment of new cities or economic zones in Saudi is just one more case of governments seeking diversification.

Governments around the globe are putting money into the system via stimulus packages in order to enhance production, consumption or to cut down unemployment which is becoming more and more problematic. How have the concerned Arab governments responded to the financial crisis?

Through increased budgetary spending for the current fiscal year, several governments in the Middle East region have adopted expansionary fiscal policies to keep providing stimulus for continued economic activity and avert the non-oil economy sectors slipping into a deeper recession - cases in particular are Saudi, Qatar and UAE. The strong recovery in crude oil prices this year have supported the increased fiscal spending budgeted for major GCC crude oil producers. As dollar-pegged currency regimes, monetary policies of the region’s Central Banks followed the sharp cuts in interest-rates by US and domestic interest-rates were reduced significantly through this crisis period. But the economy slowdown and consequent severe deterioration in credit quality and increasing loan defaults by corporate and retail borrowers also led Central Banks in the region and banks in maintaining tight lending policies. The weak credit environment has constrained growth in several key economic sectors like trading, financials and construction sector. In the midst of this crisis period early this year, Qatar and UAE governments injected capital into their leading banks to ease the tight liquidity situation and cushion their banks’ capital adequacy to support credit growth. While such measures were not implemented by Saudi and Kuwait governments for their respective banks, the Kuwait government did propose an economic stimulus spending early in this economic crisis cycle, but the proposal failed to get the required approval from its Parliament. As the worst hit country in the entire MENA region through this crisis period as also the most leveraged amongst its GCC peers, Dubai has been in serious trouble. But the government has achieved some success in resorting to re-financing measures and debt issuances to repay part of its huge outstanding debts.

It is considered by some experts that the main areas within the ME region affected by the crisis include dollar exchanges, bank operations, real estate development, tourism, oil production and public and private income. Which areas have been worst hit in your opinion and what could be further implications?

We think that during the crisis period, the worst affected sector in the economy has been the real estate sector as a result of a severe decline in real estate prices and demand slowdown with a tight credit environment causing considerable contraction in construction activity. Trading activity across the region has also been severely impacted. Growing incidence of defaulting corporate and retail borrowers has weakened the credit quality and negatively impacting profitability of banks in the region. The weak credit environment has led banks to maintain tight lending policies and therefore, lack of sufficient funding by banks continues to cripple several non-oil sectors of the economy. Decline in crude oil revenues and profitability this year have impacted the oil & gas sector too, but a substantial recovery in crude oil prices from its bottoms early this year and continued investments in expanding crude oil production facilities has cushioned this most important economic sector for the region.

Numerous fluctuations of the US dollar have had negative effects on the economic structure of GCC countries especially on their currencies and increasing inflation rates. Do you think that with the recession seeing its bottom we can expect a positive trend in this region?

The currencies of the GCC region are pegged to the US Dollar and therefore, the prolonged cycle of weakness in US Dollar this year alongside the significant strength seen in global prices of essential commodities and metals does raise concerns of inflationary pressures returning back to the GCC countries. Since economic activity in the region is still struggling for growth against a market environment of subdued demand, arresting inflationary pressures may not be an immediate objective for the GCC Central Banks. Expectations are high that economic activity will again start picking up in Year 2010 and as the credit cycle eases, inflationary pressures may further deepen. But policy makers can then react in tightening liquidity through increasing interest rates and aim at controlling inflationary pressures, without severely stifling economic growth.

MIDDLE EAST MARKET PARTICULARITIES

There have been intentions of creating a unified currency within the GCC region or to accept the Euro as the valuation currency especially because of US Dollar depreciation. Do you think that these plans are based on a political or economic background?

The economic fundamentals of major countries in the GCC region shares a lot of similarities, with crude oil being the principal contributor to government revenues and the oil sector being the single largest component of most of the GCC countries’ GDP. Fiscal finances of all the GCC governments also shares a common pattern on the nature of budgetary policies, current and trade account surplus/deficit and balance of payments. 
Other aspects like political regimes, demographics and business climate also shares a lot of commonality too. Saudi Arabia accounts for a big share of the region’s GDP followed by UAE, Kuwait, Qatar and Oman. As a major crude oil producing region, it is expected that GCC countries will need to further strengthen trade ties with its key trade partners in Asia, US and Europe and therefore, coordinated efforts will be required to align their common business interests in adopting a unified currency. One of the objectives of the single regional currency may also be to gradually move away from the long existing dollar-pegged currency regime and provide room for Central Banks in the region to exercise an independent and more effective monetary policy. However, with Oman and UAE expressing disagreements with the other member nations of GCC, the fate of the proposed currency union that was to be established in Year 2010 still remains undecided.

Middle East is becoming a more and more important financial hub. We can see that this sector accounts for a major share of the fund portfolio. What is the importance of the financial sector within the Middle East region?

The Banking system has been in existence in the GCC region for decades and in the absence of capital markets through the early stages of the region’s economic prosperity, they have played a pivotal role in mediating the flow of capital much required for businesses in the region to grow. Being the first few businesses to get listed on the region’s stock markets, banks are the largest represented sector on the region’s stock markets and have also enjoyed a consistent track record of growth and profitability – the banking sector accounts for more than 30 % of the free-float market capitalization on the MSCI Arabian Index. In the absence of an established secondary debt market in the GCC region, banks will continue to be the major financing intermediaries in the GCC region. Other financial sector businesses like insurance, leasing, mortgage financing, investment banking and related financial services currently do not have high visibility on the region’s stock markets. The GCC region has for long been enjoying high domestic liquidity on the back of growing crude oil revenues, making the GCC region a net exporter of capital. The active role played by the region’s Sovereign Wealth Funds (SWFs) in providing equity funds to some of the global companies during this current period of liquidity crunch and global economic crisis has brought much attention to the Middle East region. The GCC capital markets are still at a relative infancy compared with its emerging market peers, but holds prospects for substantial growth by bringing in greater depth in its equity and debt markets and tap into the region’s growing domestic liquidity. New financial centers in Dubai, Qatar and Bahrain have been developed to tap into this growth potential, as the region gradually adopts economic reforms and opens its financial sector to foreign investments.

Recent years have been very volatile for crude oil with prices dropping to a mere USD 40-50 per barrel, after its peak of USD 148 in July 2008. As the ME region is mostly influenced by crude oil, where do you see its price in 2010?

A resurgent commodity market this year and strong recovery in prices of Crude Oil have surpassed the expectations of many research houses, with crude oil price averaging around USD 65-70 per barrel for YTD; crude oil prices had dipped to lows of USD 35-40 early this year. Forecasts of several researchers and commodity advisors seems to broadly indicate that crude oil prices can continue to stay firm at above current levels. Although the current phase of global economic recovery is still believed to be fragile and the extent to which the global economy can get back on track for growth next year will be a critical factor for crude oil prices, there are supply side factors also at play with OPEC coordinating a central role and meeting with fair success this year in helping prices revive. Our belief is that the Middle East region can get back to its growth track for Year 2010, with the assumption that crude oil prices can continue to stay firm with prospects for even much higher average prices of USD 90-110 next year.

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