13-Jul-2017
MENA Q3 Outlook 2017

MENA markets are still struggling to catch up with Emerging markets. MENA performance of +3.37% for the first half of 2017 came shy of the+18.43% for Emerging markets. Nonetheless, with Saudi Arabia’s addition to the MSCI emerging markets index watch list and a very strong chance of an upgrade next year, the region should start to attract more attention.

With the recent addition to MSCI watch list, momentum is expected to continue in Saudi as we head into the third quarter. The market should also get more support from increased government spending as we draw closer to year end (capital spending was budgeted 59% higher versus 2016). To a large extent the government is still the main driver of the local economy, and with more reforms coming into effect, their spending program should accelerate.

Many will argue that the recent rally in Saudi will be short lived and that investors will soon come back to reality. While we do not have a crystal ball and we do believe volatility will stay high, we view recent developments as positive. It is not just about the inclusion into MSCI index itself, but we actually like the new energy among Saudi decision makers and if the positive momentum continues, Saudi is a place where we definitely want to be invested in. Indeed, there one aspect of the Saudi story on which we are getting very comfortable: not only Saudi leaders have the ability to change things, but more importantly they now have the willingness to do so.

In the UAE, the market has been very volatile recently, especially for the more speculative names. Activist investors are relatively new to the market, and we have yet to see the results of their recent involvement over the longer term. On the positive side, recovery in business activity, led by the construction, wholesale and retail sectors is supporting loan demand, and real estate prices have started to show signs of stabilization.

Things are moving slowly in Kuwait, but we still managed to find decent value there. In Egypt, we are closely monitoring the situation post devaluation and developments there are very encouraging. Engagement with the IMF, the return of foreign investors and easing capital controls are all steps in the right direction. However, the security situation remains their biggest challenge.

We are firm believers of value, whether it is the product of strong and incentivized management or a cyclical downturn. True, macro and geopolitical conditions can affect investor’s sentiment, but this also creates occasions to buy good businesses at cheaper prices. Our regional markets remain less efficient than more mature ones and this offers lots of alpha opportunities to astute fund managers. On a final note, our flagship MENA Equity returned +9.11% in the first six months of the year outperforming the benchmark by +5.24%.

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