MENA fund managers optimistic for medium and long term

In its annual review of funds in the Middle East and North Africa, Standard & Poor’s Fund Services found considerable optimism for the medium to long term among fund managers. However, most expected downward pressure on markets to continue in the short term, as the bad news needs to be further incorporated into prices.

“The region’s much vaunted low correlation with the rest of the world’s markets failed to materialise and all the major Middle Eastern markets fell significantly in recent months,” said S&P Fund Services lead analyst Roberto Demartini, highlighting Dubai and Egypt, where local exchanges were down more than 50% in 2008 to October. “The downward pressure largely came from international investors looking to exit what are, for them, off-benchmark positions,” he said.

As detailed in the MENA overview, available at www.funds.standardandpoors.com, funds investing in the region reported returns ranging from around -20% to -50% for the 12 months to October 2008. Performance for the GCC region was slightly better, although considerably down, with most funds returning between -20% and -40%. The best performing funds were those with an Islamic mandate.

“The sharp sell-off resulted in a noticeable effort to protect capital and most of the funds we cover have raised cash to significant levels,” said Demartini, explaining that SICO had applied to their regulator and obtained authorisation to raise cash above 50%. This meant that at review their funds had around 60% in cash. At the same time, the Oryx Fund had around 24% in cash and TNI 35%. In contrast, GIC Gulf Premier Fund and Makaseb Arab Tigers Fund maintained a near full invested stance, preferring to move into defensives instead. However, in the case of Makaseb, the fully invested stance was at least partly the result of substantial redemptions which ate up the cash balance previously built up.

The common view among managers interviewed by S&P Fund Services is that the upturn in the MENA region will be led by domestic investors, in particular sovereign wealth funds, which are increasingly being used as lifeboats for the markets.

“Managers believe it will take some time for international investors to venture back into the region,” said Demartini, noting that although in the short term, cash, highly visible defensives and domestic plays are being favoured, the team at SICO is preparing for a bounce back, which in their view will be led by more cyclical and riskier assets. The team at Bank Muscat also believes there might be a bounce back in the mid term and has started to position the portfolio towards cyclicals. At Makaseb, Ibrahim Masood sees oil services as very cheap, on the basis that they supply government-owned entities. There is no consensus on what is defensive, with some managers favouring consumers, while Shakeel Sarwar at SICO prefers telecoms.