S&P Fund Services – Middle East and North Africa markets heading for a correction, say fund managers
Fund managers investing in the Middle East and North Africa (MENA) are united in expecting a correction, according to the latest update on the sector from Standard & Poor’s Fund Services.
An example is Shakeel Sarwar, head of asset management at SICO, managers of the S&P AA rated SICO Gulf Equity Fund, who began the year with more than 50% in cash. Sarwar told S&P Fund Services his active management of cash during the second quarter reflected his lack of conviction in the sustainability of the sharp rally in GCC markets which began at the end of February.
“In Sarwar’s view, the markets have risen too far, too fast and could experience a correction,†said S&P Fund Services lead analyst Alison Cratchley, highlighting a similar but more specific forecast from the team at The National Investor. They believe that the seasonal slowdown during Q3, coupled with a decline in global equity markets, could trigger a major correction in regional equity prices.
Meanwhile at Mashreq, Ibrahim Masood is concerned about low liquidity and the possibility of a sell-off in the US market. He points out that so far this year the correlation of returns between the US and the MENA region has been extremely high.
“The managers we interviewed showed considerable agreement about countries and sectors,†said S&P Fund Services’ Cratchley, explaining that favoured markets included Saudi Arabia, boosted by government spending, and Qatar, despite its deteriorating growth prospects. Kuwait is generally avoided as it is thought to be dominated by investment and real estate companies.
Favoured sectors for the S&P AA rated Makaseb Arab Tigers Fund are food, beverages and tobacco, while the Makaseb Emirates Equity Fund and Makaseb Qatar Equity Fund favour telecommunications and utilities.
Shakeel Sarwar at SICO likes telecoms, consumer goods and defensive industrials but is cautious on financials and the Dubai real estate sector.
“Relative to other emerging markets, the MENA region significantly underperformed in the six months to the end of June 2009,†said S&P Fund Services’ Cratchley, pointing to the 12.7% rise in the MSCI Arabia index compared with a 37.8% rise in the S&P/IFCI Composite index. “This probably reflects investors’ perception that the MENA region is highly leveraged to a US recovery due to its dependence on oil revenues, whereas other emerging markets are supported by robust domestic demand,†she said.
