This article is part of Morningstar’s Guide to Investing in Asia where we navigate the potential risks for the chance of fantastic rewards from across the region.
“When I first start investing in emerging markets 20 years ago we were looking for one thing – population growth. It is one of the most basic measures of a growing economy, and the Middle East has it in abundance.”
Ghadir Abu Leil-Cooper, manager of the Baring Middle East and North Africa Fund, is urging investors to be brave and look beyond the negative news headlines to the growth opportunities in the region.
The population of the Middle East is steadily growing at a rate of 1.5% a year – it may not sound like much but it is the equivalent of adding a new Turkey or Egypt every 10 years. The population is young too – with an average age of around 25 years old and this young, growing middle class is creating investment opportunities. Add to this that oil reserves are some way off running out – and you can see why the region is attractive.
“More people means more jobs, it means a demand for services, for more schools, roads, hospitals, water and electricity,” says Abu Leil-Cooper.
The current infrastructure spend by Middle Eastern governments is phenomenal but they recognise that it is not sustainable, even with their cash reserves built up by a high oil price over many decades. Governments in the United Arab Emirates and Saudi Arabia among others are inviting the private sector to step in, opening up the market to foreign investors.
Saudi Arabia has recently opened its stock market up to international investors, although with some limitations. International investors are currently only allowed to own up to 5% of a Saudi listed company but in time this may be relaxed.
Too Dependent on the Oil Price?
Abu Leil-Cooper admits that in the past diversification has been a problem for the region – so much of the economy is driven by the energy sector, but she says that the fall in oil price, halving over the past year, has created both a problem and an opportunity.
“The fall in oil price has forced those countries which were solely reliant on energy to fund their economy to make reforms. These reforms are fundamentally necessary for the future sustainability of these economies – but without the fall in oil price they may not have been implemented for some time,” she said.
She admits that it has put a strain on many of the Middle Eastern markets, but over the long term she expects this to result in more diversified economies.
The stock markets are expected to become more diversified too – as families outgrow the businesses past generations founded, they are opting to IPO and issue younger generations shares rather than split up the company. Greater diversification within stock markets and more companies in which to invest are a boon to foreign investors.
Returns are Not Risk Free
Diversification will have to be done with care however. Dubai was declared bankrupt during the global financial crisis; the victim of trying to do too much, too quickly. It was then lent money by its neighbour Abu Dhabi and is taking a more cautious approach to spending – developing three and four star hotels alongside the seven star luxury palaces of the past to create a broader, more sustainable tourism sector.
It is not just overspending that investors should be wary of. Recent events in Tunisia are a stark reminder of the civil and political instability in the region. This week, after nearly two years of talks, a deal was reached with Iran over nuclear armament – but even this seemingly positive news has been met with negativity in the region.
Stock selecting against this kind of macro backdrop is tricky – and best left to a professional, taking a long-term approach. If you do not want to plump for active management, ensure your portfolio is very well diversified and any single-region exposure is only a very small allocation. If in doubt, choose a broader global emerging markets active or passive fund which has a controlled allocation to the region. It may a bumpy ride to the top.
