Each week, a professional investor tells MoneyWeek where they’d put their money now. This week: Ghadir Abu Leil-Cooper, investment manager, Baring MENA Fund, Barings Asset Management.
Equity markets across the Middle East and north Africa have been doing well recently. The MSCI Arabian Markets ex-Saudi Arabia Index rose 18% in US dollar terms over the course of 2010. Yet regional equities have only just returned to the levels seen at the start of 2009’s fourth quarter, before concerns over the scale of Dubai’s debt and the global recovery surfaced.
While strong and stable oil prices remain a key foundation for regional growth and performance, this is by no means the whole story. A number of economies are diversifying away from hydrocarbons. This is creating opportunities across a range of sectors. Elsewhere, political risk remains a key consideration when investing in the region. We continue to monitor the events in Tunisia closely. While this is clearly a de-stabilising factor over the short-term, we believe that job creation and structural reform is a must, given the young and growing population. Indeed, demographics across the region are attractive. The fast-growing, increasingly affluent middle class means we’re very positive on the long-term domestic demand story. Elsewhere, we expect strong oil prices to support state infrastructure investment, providing a further source of economic stimulus.
FIFA’s recent decision to award the 2022 World Cup to Qatar has further convinced us of the long-term growth prospects. With official estimates placing total infrastructure spending at over US$50bn for the tournament, we’re encouraged by the Qatari government’s commitment to develop hotels and stadiums and improve transport links. Thus we’re optimistic about Drake & Scull (UAE: DSI), a Dubai-based provider of engineering procurement and construction services to private and public clients in the Middle East, north Africa and Asia. Despite problems surrounding Dubai’s construction sector, the firm has grown year-on-year earnings through the downturn. With a solid backlog and a commitment to diversify geographically, it’s well-placed to generate attractive earnings growth in 2011 and beyond.
Another infrastructure firm we like is Dubai-based Depa (Dubai: DEPA), which specialises in fitting out and furnishing private and public facilities. Its portfolio includes hotels, yachts and apartments as well as hospitals, airports and shopping malls. Depa generally operates in the later stages of the construction cycle and so is relatively well protected from cancellations and defaults. It’s also well diversified in terms of geography and market segment. It has a strong balance sheet and order book and looks well placed to benefit from large-scale projects and hotel refurbishments across the region. The firm also has a presence in southeast Asia and should benefit from infrastructure building in markets such as Indonesia and the Philippines.
In the financial sector, we like Egypt-based EFG-Hermes (Egypt: HRHO), which provides brokerage, asset management, private-equity and investment banking services across the Middle East, north Africa and Asia. Given its large footprint, we believe it provides the best exposure to regional capital markets. As markets continue to mature and recover from the worst effects of the global economic downturn, EFG-Hermes is well placed to capitalise on the growth opportunities on offer. It holds a sizable cash position and aims to broaden its service offering through mergers and acquisitions.