On the final day of 2007, the Financial Times formally dubbed the Middle East and North Africa “the next investing hot spot” – a weighty endorsement confirming a meaningful trend. The FT cites BlackRock, T Rowe Price, Mizuho Bank (Japan), and Permal as actively raising funds to tap this market. Permal’s “Silk Road” fund – capitalizing on the increased trade flows between the Gulf, MENA, and Asia – reflects an important insight on how the regions’ economies are evolving.
The fundamental growth of MENA economies – and especially the Gulf states – is certainly inviting. Investors and asset managers need, however, to recognize the limitations of listed equity markets in tapping into the region’s growth.
One market reality to note is that many of the region’s most dynamic companies are not listed on public exchanges. This includes energy giants like Saudi Aramco (fully owned by the Saudi government) and family-owned enterprises like the Al-Futtaim Group of the UAE – one of the region’s key conglomerates. While some major firms (like the UAE telecom providers Etisalat) have been partially or fully listed, a great many of them are still not on the public exchange.
A second market reality is that MENA exchanges – particularly in the GCC – have been highly volatile in recent years. Between 2001 and 2006, Gulf markets experienced an unprecedented boom – the Saudi, UAE, and Qatari exchanges all rose over 600%. This boom was followed by an extreme correction in 2006, in which some markets lost about 80% of their market capitalization.
(For more on the GCC equity market boom and bust, see Chapter 8 – “Capable Capital: The GCC as a Source of Capital – of Dubai & Co.)
A third reality – linked to the matter of volatility – is that GCC equity markets are driven far more by retail investors than are equity markets elsewhere. The boom and bust of 2001 – 2006 occurred largely because retail investors who had irrationally been pouring money into the market pulled out dramatically. More mature equity markets – though also subject to emotional run-ups and sell-offs – are shaped by institutional investors who approach investment with far greater sophistication.
These dynamics lead to a market in which a firm’s strong fundamental performance may not always lead to strong equity valuations. One great irony of the 2006 crash in the Gulf was that oil prices were at an all-time high and that listed companies’ earnings were growing strongly, in line with the region’s fundamental growth.
Yes, the MENA region is primed for strong growth and warrants significant investment. Publicly listed equities, however, have limitations which investors must bear in mind. The most savvy institutional buyers will look closely at private equity investment opportunities in regional conglomerates, family-owned businesses, and cross-border joint ventures – tapping into the fundamental strength of the region while limiting their exposure to highly volatile public markets.