Equity markets in the Middle East and North Africa (MENA) region have moved higher in recent months, led by Saudi Arabia.
Here, the combination of strength in the oil price and speculation about the potential opening up of the market to foreign institutions have led to increased participation in the market from local investors, pushing the Saudi Tadawul All Share Index 23.8% higher in the first three months of this year, in US dollar terms.
Although the Saudi Arabian market is not yet directly investible for overseas investors, we have benefited from this surge of strength by increasing our exposure to Saudi through the use of participation notes (p-notes) from licensed brokers. We currently have a 13.8% weight to the Saudi market in the Baring MENA Fund.
Other markets in the region have followed Saudi Arabia's lead, with the Middle East noticeably stronger than North Africa. Increased revenues from oil and gas production have enabled capital spending programmes to continue at healthy levels, notably in Qatar, and this, in turn, is stimulating other areas of the region.
This is reflected in the portfolio composition of the Baring MENA Fund, which is heavily weighted towards the Middle East, with a positive stance towards financials (ex Kuwait) and consumer-related companies. We are equal weighted on property development companies in the Fund.
The only exposure we have to North Africa currently is Egypt, which has been a standout market this year. After a weak 2011, the Egyptian market returned 40.5% in US dollar terms in the first quarter of 2012. Investors have found comfort in the political process and in renewed merger and acquisition activity - a sign that things are very slowly starting to normalise again.
In spite of this, we remain somewhat cautious on the short-term prospects for the Egyptian market given continuing structural imbalances in the economy. Egyptian currency reserves were deployed last year to support the Egyptian pound. This is not sustainable, in our view, and one of the key issues from here will be whether the central bank can engineer an orderly devaluation, as fair value for the currency would be substantially lower than current levels. We are monitoring the situation closely.
Elsewhere in the Fund's universe, the Turkish market has been another strong performer in the first quarter, with the MSCI Turkey Index returning 27.0% in US dollar terms. We have a 12% weight to Turkey in the Fund, and investors have benefited from this exposure, but after a strong run we are close to our price targets on a number of holdings and may start to reduce exposure in the coming months as we identify attractive opportunities elsewhere.
Geopolitics in the region remain in the headlines. While this carries a cost in the form of a risk premium on equity markets, it also helps to keep the oil price high, which has provided producers with a windfall and is supportive of infrastructure and consumer spending in the region. We continue to view the longer term prospects for this resource-rich region as attractive, and believe any weakness in regional equity markets should be viewed as a potential entry point.
Ghadir Abu Leil-Cooper
Head of the Baring EMEA Equity Team
Baring Asset Management, London
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