Kuwait Financial Centre 'Markaz'The political developments in the Middle East in the first three months of the year have not just made news headlines, but have been watched closely by investors around the world. In a special interview, WIOF Middle East Performance Fund investment advisor Kuwait Financial Centre 'Markaz' answers questions about the effects of recent events on the region’s investment environment.

The Fund invests in a region which has been very much in the news in the last few months. What effects have the political changes in the region had on the investment market?

The political tension in the region has severely affected investor sentiment. Markets started the year on a positive note but panic selling has been seen in all major markets amid the growing unrest in the region. With ongoing protests in Bahrain, investors are worried about a possible repeat of such events in Saudi Arabia, the largest equity market in the region. Markets have been extremely volatile in recent weeks, especially the Saudi equity market. Though markets have bounced back from their lows and much of the losses have been recovered, markets still remain on edge. The S&P Pan Arabia Index and the S&P Saudi have dropped 9.8% and 9.5% respectively from their recent highs this year.

Some economists have suggested that the upheavals in some Arab states could actually lead to a fresh wave of foreign capital coming into the region as governments open up their markets and divest some state assets, such as in financial services, telecoms and tourism sectors. Do you think this is likely, and if so, over what time scale?

For the return of investor confidence in the region it is very much essential that some sort of stability is established. Governments in the region will be more active in taking steps supporting social and economic development. Therefore, on the back of such reforms, we could see more foreign capital coming into the region.

Oil, and revenues from its production, is central to the region and its economies and is also a key consideration for investments. How do you view near and mid-term developments in oil supplies and prices in the light of the recent events?

Fear of disruptions in oil supplies has seen crude oil prices already reach year highs and we believe upside pressure on oil prices will remain in the near to medium term.
However, we don’t see supply worries escalating greatly as OPEC members have the capacity and will to meet the supply gap that could arise out of the current turmoil.

As a portfolio manager what steps, if any, can you take to mitigate negative effects on a fund’s performance in cases like this where there is sudden political turmoil?

Due to limited hedging instruments available in the region, the only way to mitigate negative effects on fund performance in cases like this is to adhere to stop loss levels and actively manage cash. Raising cash levels is the most effective move to mitigate risk in such turmoil.

Do you think the effects of the recent political troubles on the investment environment in the region will be felt for a long time to come or do you think investor sentiment is likely to improve quickly?

Investor sentiment has already improved slightly following the Saudi government’s strong words and actions against any kind of protests. It has banned all forms of demonstration and the much talked about March 11 protests in Saudi Arabia did not take off. Investors are still nervous about the Bahrain situation and its contagion effects. But investor sentiment will certainly improve quickly once the Bahrain situation cools off.

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