01.11.2012

Yong Wei Lee

Portfolio Manager

Emirates NBD Asset Management Ltd

Despite the political upheavals it has seen over the last year and a half, 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.

 

GROWTH OPPORTUNITIES

The region is a highly attractive one for investors seeking growth opportunities. A high oil price is seeing USD3bn per day flow into state coffers in the Middle East. These petrodollars are being reinvested into the local economy, creating earnings opportunities for companies from a broad range of sectors, from construction firms building infrastructure like roads and buildings, to leisure operators in tourism hotspots as well as banks providing loans for houses and businesses. Latest data and estimates for the region show that profit growth is forecast to be higher than developed and emerging market equities in 2012, whilst valuations are lower on a price-to-earnings ratio and price-to-book ratio basis. The Middle East also offers comparatively higher income through dividends.

 

 

MARKET ATTRACTION

Specific characteristics of the region’s stock markets themselves also offer opportunities for investors.

  • Local stock markets are typically seen as either “frontier” or “emerging” markets because they are relatively new and small. However, the region is attracting more interest from foreign investors who pursue diversification strategies and listed companies are currently benefiting from strong regional trends.
  • Stock exchanges are also working towards attracting greater investment from foreign investors. This is exemplified in the UAE and Qatar, where exchanges are working towards being included in the MSCI Emerging Market Index. In addition, Saudi Arabia, the largest market in the region by market cap, has indicated it may open to foreign investors.
  • MENA stock markets have lagged developed market growth from 2009 lows. Between February 2009 and May 2012, the S&P 500 recorded 60% growth, while the S&P Pan-Arab index has shown only 28% growth in the same period. This lag represents an opportunity for growth of undervalued equity securities within the MENA region.

 

BEYOND OIL

For some investors, the Middle East continues to be seen largely through the prism of being the world’s oil powerhouse. Indeed, revenues from hydrocarbons are a critical driver of economic growth within the region. The MENA region, plus Iran, accounts for nearly one third of global oil production and 60% of global proven crude reserves and the region’s natural resources will provide steady income due to a continued global demand for energy. However, the oil and gas sectors are not the whole story. Other areas, such as financial services, trade and logistics, as well as tourism are also experiencing strong growth. Governments have also made significant commitments to develop world-class infrastructure, providing a further source of economic stimulus.

 

GROWING IMPORTANCE

The economic health of the region also provides a strong base for continued opportunities in the future. Healthy trade surpluses have led to resilient economies for the Gulf Cooperation Council (GCC) countries. They have superior fiscal balances when compared to both developed and other developing economies, which has given them much lower levels of sovereign debt.

 

 

 

The combined Gross Domestic Product (GDP) of the six GCC member countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE) is expected to grow by 4% in 2012 and this growth is expected to increase in 2013, according to the International Monetary Fund (IMF). Meanwhile, the GCC is also growing in importance as an economic and trading hub. In 2020, the GCC is projected to be a USD2 trillion economy, providing nearly one-quarter of the world’s oil supplies as well as increasing quantities of petrochemicals, metals and plastics and growing at a similar pace to Russia and Brazil.

 

OUTLOOK

The recent announcement by the European Central Bank (ECB) on bond purchasing coupled with the US Federal Reserve’s decision to implement QE3 is likely to remain positive for globally sensitive stocks. Hence, oil prices are expected to remain well supported and this would be beneficial for both MENA stocks and, more specifically, petrochemical stocks. In addition, given that interest rates are likely to remain low for a protracted period of time, high dividend yielding stocks are expected to do well. In MENA markets, it is not uncommon to find companies that pay dividend yields in line with, or above, bond yields, with the additional prospect of capital gains. Despite these benefits, MENA stock valuations are not demanding (Editor´s note: are not expensive). These benefits are expected to be positive drivers for MENA stocks over the next six months.

 

INVESTMENT ADVISOR

The Fund’s investment advisor is Emirates NBD Asset Management. Regulated by the Dubai Financial Services Authority, Emirates NBD Asset Management is the asset management division of Emirates NBD Bank, the largest bank by assets in the MENA region. It manages approximately USD1.3bn (as of 31.03.2012) across a range of products including MENA equity and fixed income funds, global risk profiled funds and a complete range of Sharia compliant vehicles.

 

 

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 17 December 2010 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.