28.03.2012

Amani Al Omani

Portfolio Management Team

Kuwait Financial Centre 'Markaz'

 

Despite the political upheavals it has seen over the last year, the Middle East remains a region with sound economic fundamentals and attractive investment opportunities. The WIOF Middle East Performance Fund offers the chance to invest in markets that are expanding and developing as governments across the region pump trillions of USD of oil-driven revenues into diversifying their economies to ensure stability and growth for the future.

 

OVERVIEW

Investing in equities listed on regional stock markets and local corporate and sovereign debt instruments, the Fund aims for long-term capital growth in USD. It is ideal for investors interested in specialised capital markets and who are looking for absolute returns within an equity product.

 

BEYOND OIL

The Middle East remains the world’s oil and gas powerhouse. It holds almost 40% of the world’s oil reserves and more than a quarter of its natural gas. Both commodities remain the prime drivers of the region’s economies. Revenues from hydrocarbons are a critical driver of economic growth within the region, and historically the performance of regional stock markets has moved in tandem with oil prices - periods of high oil prices, and consequently high economic growth, fed into stock markets through increased liquidity and petrodollars.

But Middle Eastern countries have been aware of the need for diversification and the danger of economic overdependence on oil. As they look to ensure the long-term future of their economies, recent crude oil surpluses over the past few years have been invested into non-oil sectors.

 

  • Projects worth more than USD2tn are either planned or under construction in the region in sectors including transport, nuclear energy, electricity, tourism, hospitality, IT, media and communications, finance and metals.
  • Qatar alone is spending USD100bn on projects linked to its hosting of the 2022 World Cup.
  • There have also been moves into the renewable energy sector and Abu Dhabi is the headquarters of the International Renewable Energy Agency.
  • Aluminium industry operations in the region provide 50,000 jobs directly and in related industries.

 

The economic diversification seen across the region has been aimed at developing value-added diversified sectors to local economies. This presents investment opportunities in sectors which are involved in this expanding growth, including financials, materials, industrials and telecoms – all of which are sectors which feature prominently in the Fund’s portfolio.

 

FUNDAMENTALS REMAIN STRONG

The region has been very much in the news since the early part of 2011. Political uprisings and turmoil have been a feature across the Middle East. But while it would be impossible to ignore the effects these events have had on some countries, the region’s economic and investment fundamentals remain strong:

 

  • Gulf Cooperation Council regional corporate earnings growth is set to continue steadily in 2012, with earnings topping USD64bn. UAE corporate earnings are set to grow at 23% while those in Saudi Arabia and Kuwait are forecasted at around 19% each.
  • Regional growth projections remain better than the global average and double-digit growth is predicted for some countries in 2012.
  • There has been positive government action in regional states to address social issues and provide support for economic sectors.
  • Privatisations should reinvigorate the private sector and induce long-term growth stability.
  • Increased government spending will support medium-term economic growth.

 

OUTLOOK

Looking ahead, there are strong indications that the region as a whole should do well in 2012. If US growth stays on track, inflation in emerging markets and the Eurozone continues to fall, and there is real progress in solving the European debt crisis, regional markets should perform positively. During 2011, Brent oil prices rose almost 18% whereas the S&P Pan Arab index was down 12% - a historic divergence between oil prices and stock market performance which is thought to have been down to increasing political risk in the region, declining investor confidence and poor corporate governance of listed securities. But with all these issues likely to be resolved or seen as being tackled in 2012, that divergence should disappear.

 

In terms of individual regional markets:

  • Qatar is set for a positive year on the back of continued strong economic growth, rising consumer demand and plans for significant government spending.
  • In Kuwait, political tension and the slow execution of government and infrastructure projects seen last year could continue to dog the market there in 2012. Meanwhile, lower credit growth as banks struggle with high non-performing loan ratios is also likely to be an issue.
  • In Saudi Arabia, significant development plans and ample financial resources will reduce the downside risk of a continued global economic slowdown.
  • For the UAE, the possibility of the MSCI UAE Indices being upgraded to emerging market status would be a welcome fillip. However, significant volumes of debt maturing during 2012 may exert severe pressure on corporate sustainability and earnings.
  • The fund will also be closely monitoring Egypt to see if the recent market turnaround and strong gains signal a long-term trend and real market recovery.

 

INVESTMENT ADVISOR

The Fund’s Investment Advisor is the Kuwait Financial Centre 'Markaz' (Markaz). Established in 1974, it has since become one of the leading asset management and investment banking institutions in the Arab region. The company was listed on the Kuwait Stock Exchange (KSE) in 1997 and is rated BBB+ by Emerging Market Rating Agency Capital Intelligence. Markaz offers fully-fledged services in asset management and investment banking. Tested through challenging conditions on local, GCC and international stock markets for many years now, Markaz Asset Management activity has consistently outperformed the relevant benchmarks on its equity funds and managed portfolios.

 

IMPORTANT NOTE: This report has been prepared for information only, and it does not represent an offer to purchase or subscribe to shares. World Investment Opportunities Funds (“WIOF”) is registered on the official list of collective investment undertakings pursuant to part I of the Luxembourg law of 20th December 2002 on collective investment undertakings as an open-ended investment company. WIOF believes that the information is correct at the date of production while obtained from carefully selected sources considered to be reliable. No warranty or representation is given to this effect and no liability can be assumed for the correctness or accuracy of the given information which may be subject to change at any time, without notice. Past performance provides neither a guarantee, nor an indication of future performance. Value of the shares and return they generate can fall as well as rise. Currency fluctuations, either up or down, may also affect value of the investment. Due to continuing market volatility and exchange rate fluctuations, the performance may be subject to significant changes over a short-term period. Investors should be aware that shares in the financial instruments entail investment risks, including the possible loss of the invested capital. Performance is usually calculated on the basis of the relevant NAV unless stated otherwise. Performance shown does not take account of any fees and costs associated with subscribing or redeeming shares. It is assumed that all dividends were reinvested. WIOF prospectus is available and may be obtained through www.1cornhill.com. Before investing in any WIOF Sub-fund(s) investors should contact their financial adviser / legal adviser / tax adviser and refer to all relevant documents relating to the WIOF and its particular Sub-fund(s), such as the latest annual report and prospectus that specify the particular risks associated with the Sub-fund, together with any specific restrictions applying, and the basis of dealing. In the event investors choose not to seek advice from a financial adviser / legal adviser / tax adviser, they should consider whether the WIOF is a suitable investment for them.