However, managers of funds investing in the Middle East and North Africa are positive on the outlook for the region even after last year’s rebound, which they attribute largely to the strength of economic fundamentals.
In 2007, the best GCC market was Oman (+51.4 per cent) and the worst Bahrain (+15.8 per cent). Among the non-GCC countries in the Middle East and North Africa (MENA) region, the top performer Egypt returned 54.9 per cent and Jordan returned 20.9 per cent, according to the latest update on the sector from Standard & Poor’s Fund Services, the leading provider of qualitative fund management ratings.
“Managers consider that despite the good performance in 2007, market valuations remain attractive relative to global markets and especially to other emerging markets,” said S&P Fund Services lead analyst, Alison Cratchley, citing statistical evidence from Shirish Raut, manager of the S&P AA-rated Oryx Fund. He pointed out that the GCC markets were currently trading on a prospective P/E ratio of 9x-16x against 15.5x for the MSCI Emerging Markets index. Earnings growth is expected to be between 18 per cent and 25 per cent in 2008 and to accelerate in future. At the same time, the non-GCC countries in the MENA region are trading on multiples of 10-14x 2008 earnings, offering earnings growth of 15-20 per cent.
“Despite this, the managers expect volatility to continue in the short-term,” said Cratchley. However, she noted Raut’s argument that these markets are less volatile than developed markets.
Signs that sentiment among local investors is improving have been seen in the strong response to most of the regional IPOs. Dalia Shafik, manager of the S&P AA-rated EFG Hermes Egypt Fund gave S&P Fund Services the example of the long-awaited IPO of real estate developer Talaat Mostafa Group, completed in November 2007 in a deal exceeding EGP 4.0bn. While the private placement tranche, sold to international and high net worth investors was covered more than 17 times, the public offering, open to Egyptian retail investors, was 41 times oversubscribed.
Overall, M&A activity in the region accelerated in 2007 and the trend is expected to continue.
