Concerns remain for Middle East investors
Investors are showing strong interest in the Middle East, as prospects appear less dire for banks, real estate and certain Saudi family groups in the region. But more transparency from banks and private family groups is needed, among other things, says Fadi Al Said, head of equities for the Middle East at ING Investment Management (ING IM) in Dubai.
Al Said runs ING Middle East and North Africa (ING Mena), ING's flagship fund for the region, which has $54 million in assets under management, around half of ING IM's total Mena-invested AUM. His team also advises on the Mena portion of the ING Taiwan fund, which usually accounts for around half of that fund's portfolio.
ING Mena is up 44% from January to October 31, while the benchmark index (MSCI Arabia excluding Saudi Arabia) is up 17%. It is one of several funds now managing Mena investments with a team on the ground in the region.
There's a very strong pipeline of demand for the fund at present -- ING IM has won three mandates in the past two months to manage Mena and Gulf Cooperation Council equities: two white labels and one sharia-compliant mandate. "We're looking at seed capital going into these funds," says Al Said, who declined to give any further details.
A lot of the inflows into ING Mena, since it launched with $4 million in November 2008, happened during the summer, he says. Al Said is also seeing increased investor interest in the region generally, due to the improved macro outlook.
He is confident investor flows will continue for several reasons. To start with, he cites a substantial pipeline of IPOs, and says conditions for those listings are strong now. Al Said also expects to see the region represented more on the radar screens of international fund managers; for one thing, index provider MSCI Barra is considering some countries in the Mena region for inclusion in its emerging markets index.
Another positive factor is that Middle Eastern banks appear in better shape now than earlier in the year. "A lot of banks at the start of the year were in denial mode regarding their non-performing loans, but we were always of the view that we would see increases in provisioning [for NPLs]." They had historically announced NPL figures annually, but central bank rules asked most banks this year to reveal their numbers quarterly.
Like ING IM, the markets expected bad NPL figures, so were pricing in disaster scenarios, he says, such as that the government would intervene and bail out the banks, hence diluting equity-holder banks' shares, but that didn't happen. As a result, banks were trading at low-single-digit price-to-earnings ratios and below reported book values, indicating very severe conditions indeed, which was not in fact the case, says Al Said. In fact, the government ended up providing cheap funding to help the banks.
It also helped that some banks were conservative, so took higher provisions, which hit their profits, but definitely improved their coverage ratios and will improve future profitability, he adds.
ING Mena's exposure to financials (including real estate) was almost 32% as of the end of September, while the benchmark index had 53% exposure. That is up from a very low weighting in the ING fund of 10% or 15% at the start of the year, says Al Said. "Our exposure increased gradually as transparency and visibility increased," he adds.
Other evidence of improved investor prospects, says Al Said, include that private Saudi family groups Saad and al-Gosaibi have resolved some of their debt-refinancing problems, and that prices of Dubai real estate are stabilising.
Saad and al-Gosaibi faced refinancing issues earlier this year due to the closure of the debt market, but they didn't want to sell assets at distressed prices. Their combined exposure to debt of regional and international banks was reported to be around $10 billion (Saad owned 3.5% of HSBC, for example). Saad has managed to settle its loans with Saudi Arabian banks in the past two months.
"From zero information and transparency at the beginning of this [crisis], we are now getting clear announcements that some banks are getting some leads from these groups on settling big chunks of their debt," says Al Said. "Of course more disclosure needs to be made, but banks are reluctant to make big disclosures, as they don't want interference while the negotiations are taking place over restructuring or paying back debt."
With regard to Dubai property, following declines of 45-50% in prices since the peak, the market is still oversupplied and speculative demand has weakened substantially, he adds. However, real demand has increased due to more affordable prices, but has not reached its potential, as the mortgage market is not as strong as in the past and needs to be "jump-started".
Still, there are some clear signs that the real estate markets are bottoming, says Al Said: rents are stabilising and even increasing in some cases. But Al Said still expects declines of 10-20% from current prices by the end of 2010, although he stresses the fall will be more gradual than previously.
That is a good thing for the stock markets, he adds, which are particularly sensitive to sharp, heavy falls in real estate prices. "[The equity] market doesn't like price shocks," he says. "Markets will be able to digest gradual declines in prices and banks will be able to manage this kind of slower trend of asset prices deflation."
And even a gradual decline could be avoided if the global economic recovery picks up pace, he adds.