The MENA region includes the Middle East and the North of Africa, and it is an area full of opportunities for investors as it accounts for more than 60% and 40% of the world’s proven oil and gas reserves respectively. Investment funds in MENA countries are still small relative to those in countries with similar economic and demographic characteristics.
We have analysed three of the best funds to invest in the MENA region from JP Morgan, Fiera Capital and Franklin Templeton, as per Morningstar total returns 5 years annualised.
Source: Morningstar 27/07/2021
JPMorgan Funds – Emerging Middle East Equity Fund
Lead managed by Habib Saikaly with Oleg Biryulyov as the back-up portfolio manager
The EMEA investment professionals draw on the resources of our Global Emerging Markets (GEM) research platform within the EMAP Equities team. Bottom-up stock analysis is conducted by both portfolio managers and analysts; they sit in various locations around the globe. Top-down analysis and research is conducted by the EMAP Equities team as well as by members of the JPMAM global research platform. The team, with extensive investment and market expertise, conducts and directs analysis at the macro, country, sector, and company levels.
The global portfolio managers draw upon the inputs and experience of the regional portfolio managers and sector analysts, organized into six, broad sector groups: Consumer; Healthcare; Financials; Natural Resources and Industrials, and Technology and Communications. In addition, product-focused analysts provide analytical support for specialist and region-focused funds. We seek to outperform by investing in high-quality businesses that can compound strong growth over long periods. This effort is supported by in-depth fundamental research, and our valuation framework helps to ensure we pay an appropriate price for the opportunity.
Our investment approach is based on capitalizing on these fundamental characteristics over 3-5 years, which we believe to be a longer time frame than that of the average investor.
The two basic pillars of our investment philosophy are understanding and valuation. Our investment process is designed to enhance our understanding of the companies and countries we invest in and determine the correct valuation of growth prospects that our understanding leads us to expect.
This leads to a portfolio of small and mid-caps and an active share of 50%. Regarding ESG, we believe strongly that ESG considerations need to be a foundation and integrated into any investment process supporting long-term investing and that corporate policies at odds with environmental and social issues are not sustainable in the long run.
Fiera Capitals Insights on African and Middle East Equities
Dominic Bokor-Ingram, Senior Portfolio Manager, Magna MENA Fund
The Frontier and Smaller Emerging Markets team at Fiera Capital have been investing in the countries of the Middle East and Africa for many years. Our global philosophy when looking at Emerging equity markets is that political, economic, and stock market reforms create economic growth. The last five years of evidence in the Middle Eastern and African markets provide a clear illustration of just how significant those reforms can be.
Most of sub-Saharan Africa has been enveloped in a negative reform spiral that has both produced economic growth rates substantially below their potential and a dwindling of their equity markets to insignificant sizes in both a global and local context.
The two most significant equity markets in the region, Nigeria and Kenya, turn over between them less than $10m a day. A combination of economic mismanagement and corruption, large fiscal and trade imbalances in the case of Kenya, and capital controls in the case of Nigeria, have led to government funding requirements crowding out the private sector and economies that struggle to grow at rates corresponding to their potential.
Conversely, leading the way in the Middle East, five years ago, Saudi Arabia, on the back of a political succession plan, announced the most drastic social and economic reforms in its history. Saudi Vision 2030 and the National Transformation Plan set out a road map for Saudi Arabia to address the inevitability of their hydrocarbon resource base depleting and to stimulate the non-oil economy in a way that Dubai has succeeded in doing over the previous 25 years. Stock market reforms, with the culmination of achieving MSCI Emerging Market status, were a large part of the plan and have already managed to triple the liquidity and size of the local bourse, thereby providing an abundant source of cheap growth capital for the nations corporates.
Similar processes have been underway in Qatar, UAE, and Kuwait, where stock market reforms have driven billions of dollars of capital into these countries’ equity markets. Whilst equity market performance over recent years in the Middle East’s largest four markets has been very strong, particularly relative to Global Emerging Markets, we could well be on the cusp of a further re-rating, as global and local conditions coincide to produce the potential for significant asset price inflation. With their monetary systems tied to the dollar (Kuwait has an undisclosed basket of (Currencies including the dollar) and economies geared to petroleum exports, the MENA bourses have been underwritten by an almost perfect reflation combination.
The fiscal purse strings should gradually be replenished with continued commodity strength whilst inflationary pressures start to grow. A combination of higher oil and gas prices and ultra-low US interest rates have the opportunity to inflate asset prices quite dramatically, on the back of significant positive recoveries in nominal corporate earnings growth. As with so many regions and countries, reforms are introduced when the economy, and therefore the politicians, are struggling. The evidence of the last five years in the Middle East is that the oil depletion cliff edge is keeping reform processes on track regardless of commodity prices and, therefore, the continuation of a multiyear asset story remains firmly on track.
The Magna MENA Fund, having achieved its ten-year anniversary earlier this year, has produced a positive return of +17.6% (EUR net composite) year to date. The Fund’s 1 year annualised performance is 36.2%, 5 year annualised performances of 11.5% and 10 year annualised performance of 15.1%. This long only equity Fund invests in the public markets of the Middle East and North Africa regions. All date EUR net as at 28 May 2021.
Franklin Templeton Emerging Markets Equity
Bassel Khatoun, Senior Managing Director, Frontier, and MENA
Although 2020 was a challenging year for MENA markets, we expect a strong recovery in corporate earnings in 2021 and 2022 to provide support for current valuation levels. The wide dispersion across the region creates opportunities for active management. Well-managed lockdowns and aggressive vaccine rollouts have paved the path to mobility normalization in the MENA region, which in turn should accelerate an economic rebound. Crucial fiscal and economic reforms coupled with timely and ample liquidity support have also provided the foundation for MENA GDP growth to rebound to 2.7% in 2021 and strengthen further to 3.8% in 2022. Higher crude prices and the mobilization of ambitious project spending plans suggest further upside to these projections.
The MENA region’s young population, nearly 200 million people, with high potential for productivity, creates a long demand runway for consumption growth. An active base of young and tech-savvy consumers coupled with strong internet penetration and high-income per capita provides a supportive backdrop for e-commerce in MENA. Despite rapid growth, e-commerce penetration in MENA remains low compared to its developed and emerging peers, setting the stage for a multi-year catch-up. A resilient economy, continuing reforms and an extensive COVID-19 vaccination programme leads us to maintain a favorable outlook on the UAE. A recovery in the residential real estate market coupled with expectations of a rebound in tourism also bodes well for equity prices.
The Egyptian economy continued to grow in an environment where most economies contracted sharply. Its currency has also remained largely stable supported by a combination of controlled inflation and solid international reserves. Although low liquidity has been a challenge for the market, strong fundamentals and increasingly attractive valuations contribute to support our positive view.
The strategy has been underweight large caps since 2012. We find greater opportunities to add value in the small and mid-cap space, which have contributed more than half of the alpha for the fund. This is a direct reflection of our research efforts, as over 70% of our stock coverage is in the small and mid-cap space.At Franklin Templeton we have one of the most experienced investment teams in the MENA region, including two portfolio managers and four research analysts.
The average industry experience of the MENA Equity portfolio management team is 14 years.We have broad research coverage in one of the most under-researched regions globally. Our on-the-ground investment experts are dedicated to the MENA region with access to all markets, including Saudi Arabia.A long-term, stock-driven, valuation-aware and ESG-integrated focus is central to our investment approach. We seek companies with sustainable earnings power, trading at a discount to their intrinsic worth. Although the core of the portfolio remains in companies that have strong earnings visibility in consumer-facing domestically driven sectors, we are also exposed to cyclical companies that are pricing in excessively negative outlooks.
If you want to read more articles like this, and learn more about investments in the MENA region or Equities and Emerging markets in general, check our equities section.