Christopher Johnson: Welcome to Morningstar U.K. My name is Christopher Johnson. Today I'm joined in the studio by Dominic Bokor-Ingram, Senior Portfolio Manager in Emerging Markets and Frontier Markets at Fiera Capital. Dominic, thank you so much for taking the time to speak to me.
Dominic Bokor-Ingram: Very welcome.
Johnson: Events on October 7th reignited the Israel Hamas war. How has the conflict and the spread of instability in the region impacted the economies in the GCC?
Bokor-Ingram: I think that over the last six months or so the GCC have made it absolutely clear that they have no interest in kinetic war with Iran or with any other country in the region. They also have no real interest, it seems, in the Palestinian cause, evidenced by the fact that very few refugees have made it out of Gaza and very few of these countries have taken in any refugees. So, in 2013 when Saudi Arabia embarked on this sort of path of peace, if you like, and reconstruction of their economic and social environment, it's become pretty clear that that is the long-term path they have chosen. They've chosen the path of economic development and recycling oil money back into the economy to create the non-oil economy that's sustainable for decades.
And so, what we haven't seen is any real impact in these economies from the Israel Hamas war. It's been very contained. And the only real impact is more on a global scale where some of the inflationary pressures that we see globally are certainly being exacerbated by the shipping constraints around the Red Sea and the extra distance shipping has to travel and also in higher energy prices through more uncertain times, let's say in the region. I think it's highlighted to these countries which is not just Saudi Arabia but also Qatar, UAE, Amman, Jordan that the path to long-term sustainability and removing the existential threat of running out of energy is to create relevance in the non-oil economy in terms of their position globally. So, I see it actually as accelerating the reforms that are happening in the Middle East.
Johnson: Over the three years to the end of February, the Magna MENA Fund return reached over 30% outperforming the index. So, what's been the key to the fund's success?
Bokor-Ingram: There are a lot of companies in the Middle East that have been listed for a very long time, in sectors like oil and gas and petrochemicals, et cetera, where your return is basically dictated by the global oil price, global refining spreads. But the success really of the national transformation plan in Saudi and these other countries has been the growth of the non-oil economy, where in recent years you've got growth rates in non-oil, whether it's Saudi or Abu Dhabi or Qatar, of 9% or 10%, which is pretty close to the emerging market growth rates we got in the 1990s in China. This is really the reason why we should be investing in emerging markets. And companies that are exposed to those kind of growth rates can grow very, very quickly. We have the expertise and the experience and the bottom-up process to be able to value these companies in countries where most global investors are not looking.
Johnson: Is Saudi firm Alkhorayef Water and Power Technologies one of the companies that you're referring to?
Bokor-Ingram: As a good example. When the national transformation plan and the Saudi Vision 2030 were announced in 2015, there was a plan to upgrade the economy at every level, and water and sewage was one level. And there was a plan to increase the number of homes with clean drinking water from 15% to 85% in rough numbers from between 2015 and 2030. Now, almost the unique aspect of the Middle East in a global emerging market context over the 30 years of emerging markets is that not only do they have the right reform process to create this non-oil economy, they also have the money to do it. So, you don't have to wait for the impact of infrastructure investment to grow your economy. You can do all the infrastructure investment and grow your economy whilst you are reforming.
This company has about a 50% market share in the water industry in Saudi. Now, as each new town gets a new desalination plant, new sewage works, they get the contracts to build them. And in addition, they obviously then connect up all the houses and get the ongoing revenue forever from providing water services. So, it's unusual in any markets to consider water stocks as growth stocks, but it's the changing structure of every level of the Saudi economy that enables this kind of investment to work out.
Johnson: And Saudi Arabia is your top country allocation at 69.5%. So why is it the leader?
Bokor-Ingram: If you look at the extent of the reforms in Saudi, they've been way beyond what any other country has done. And Saudi is a much bigger country than the other investable countries in the region. And therefore, the economies of scale of what they're able to do are able to drive even greater economic growth. So, there's kind of a natural tendency towards companies that have a much bigger market, if you like. And that's certainly the case in Saudi. It stands out when within the region. They obviously have a bigger population. I think that they have probably – as the whole region has learned from what happened in 2011 with the Arab Spring, the bigger the population you have, obviously the more people you need to satisfy in order to keep the population happy, which is ultimately how governments and administrations stay in power. So, I think Saudi have had to move at an even faster pace than the rest of the region, and hence it's been a much more attractive market to find growth opportunities.
Johnson: And financials is the largest sector of the fund, at 23.2%. So, why are you so bullish on this sector?
Bokor-Ingram: Throughout history, in any country that has embraced capitalism, if you like, and a capitalist economy, the companies that have to work first are the banking sector, because they're effectively the conduit for finances, wherever they're coming from, the Saudi government or from international investors, through to actually lending to the companies, you have to have that conduit in the middle. And therefore, on this path of growth and reform, it's the banks that have to lead.
Johnson: There are a lot of people who criticize Saudi Arabia or UAE for greenwashing, sportswashing. What would you say to those people that have concerns about investments in those countries, and also can investments in the Middle East align with ESG principles?
Bokor-Ingram: On the discussion around sportswashing, I think when Sky TV first invested in UK football and formed the Premier League back in 1991, that wasn't a profitable organization and operation from the start. They needed to invest a lot of money before they got to the point where they were actually – and sell a lot of Sky dishes that they were at the time to get to the point where they were profitable. I don't really see what Saudi Arabia is doing any differently right now, apart from investing in sport. There's absolutely no question that sport is great business. They're coming from a long way back and therefore they need heavy investment in business in order to get control. And in the short term, the beneficiaries are sports people. I don't know why there is a concern about sports people who have worked all their lives for a particular goal, being well rewarded for what they're doing, being described as sportswashing.
Johnson: From my readings and so forth, that people would argue that they are getting involved within the UAE hosted COP28 and they're buying new cars for Saudis – bought new cars. So, they're almost using their financial power to maybe wash their image which people might criticize them for human rights abuses and so forth. I think that's where some people are coming from.
Bokor-Ingram: I think that what the countries in the Gulf are trying to do is become relevant long term in, if you like, global society. If you think about the existential risk to the Gulf region, it's effectively running out of oil. And first of all, the oil does run out at some point, as has been seen in Dubai. And secondly, we as their customers are telling them we don't want to buy their oil and actually we don't want to buy any oil. So, if you're sitting there with the long-term future of your country under existential risk because if you don't have oil and you don't have a non-oil economy, then you effectively don't have a defendable country if you like. You have to work out what else you need to do to make yourself relevant enough and important enough in the world to be taken seriously and defended effectively. So, if you look at what the Middle East have done with airlines, Doha now is probably the biggest transit airport in the world. The other Middle East airlines have got huge market share. If you look at what they're doing in the sports industry, the ESG industry, they're trying to make themselves as relevant as they possibly can.
Johnson: The UAE is the second largest country allocation. And I was interested in your view of Emaar Properties. So, I went to Dubai last year and Emaar Properties is everywhere. And it represents 5.06% of the fund. So how much does the stock contributes to the fund? And also, what is your view on the real estate sector in driving growth within the UAE but the wider region?
Bokor-Ingram: The real estate sector certainly has a massive part to play in driving growth in the UAE. I mean, if you go back a little bit in history, 30, 40 years ago, the UAE was 95% oil and 5% non-oil. And today, Dubai particularly is the other way around. And they've created a non-oil economy basically out of financial services, tourism and trade. And in order to do that, you need a very strong real estate sector. They've also developed themselves. And again, this is from a lot of the other work they've done about increasing the relevance of the country into a financial centre, financial hub in the region, and a very nice financial hub for people to go and work and live. And one of the ways you do that is providing great infrastructure and great housing, et cetera. So, it becomes a kind of virtuous circle. If you look at the number of technology companies which has accelerated since a lot of Russians left a couple of years ago, where did they go and relocate? UAE. Why? Because you've got a strong rule of law. You've got a very efficient banking system. You've got very good housing and other sort of social amenities. And you've got a very good business infrastructure. In terms of their attractiveness for going and setting up business and being a regional hub, we think that there's a lot of upside still in the real estate sector.
I think that what happened with Emaar and addressing the corporate governance concerns around Emaar just over a year ago have made the whole market much more attractive, both for investors, but also because valuations are now a bit higher for more companies to come and list on the stock market. So, I think you could well see over the next couple of years a substantial increase in the UAE stock market.
Johnson: What were those corporate governance concerns of Emaar?
Bokor-Ingram: Emaar listed one of its subsidiaries a few years ago and promised to pay a dividend when it listed and never came through with that dividend. I think the UAE administration saw the amount of money that Saudi Arabia was raising in the equity markets. And equity market money is long-term money. Once it's in, it's very stable. And that can be used for long-term growth projects, which is ultimately how you build infrastructure, et cetera. And Saudi have been probably the most successful country I've seen in emerging market history from a standing start in 2019 at using the equity market for exactly what it should be used for, which is raising cheap equity capital, to the point where in the last two years, I think Saudi has been the most active in terms of volume and number of stocks IPO market in the world, including developed markets. So, I think the UAE looked at that and thought that there was an opportunity there because they're obviously very similarly located and very similar structures to expand their equity market and raise cheap growth capital. And so there was a decision that we need to address the corporate governance issues of the past and make our market much more investable and friendly to minority shareholders.
Johnson: Dominic, thank you so much for taking the time to speak to me.
Bokor-Ingram: Very welcome.
Johnson: This is Christopher Johnson for Morningstar U.K.
