Confidence boosts MENA mutual funds to reach USD59bn – Zawya 06 May 2013 Following the 2008 global financial crisis, the Middle East and North Africa (MENA) was one of the few regions in the world to post robust fiscal growth.
However, the Arab Spring in 2011 pulled the economy of some MENA nations backwards as unstable political environment drove investors away. One of several sectors that bore the brunt of the socio-political tension that year was the funds industry, but the downtrend proved to be short-lived. By 2012, the industry has managed to gain ground, ending the year with very strong performance.
As of December 2012, the MENA funds industry was valued at USD 59 billion, with the GCC accounting for the bulk or USD 30.9 billion. Saudi Arabia and Morocco remained as the largest fund domiciles in the region with 228 funds worth USD 22.85 billion and 175 funds worth USD 14.92 billion, respectively. Together, these countries represented more than 50% of the regional funds industry.
Confidence also recovered in 2012 as the number of launched funds increased by 10.77% to 72 from 65 in 2011. The number of equity funds launched in 2012, however, dropped to 22 from 35 in 2011 while the number of new fixed income funds increased from nine in 2011 to 20 in 2012. The MENA trend is similar to that witnessed in other parts of the world, where equity funds saw outflows and fixed income funds experienced an increase in assets under management (AUM).
Islamic funds gather momentum
In 2012, investors’ interest in Islamic assets had been high, with Shariah-compliant funds accounting for 34% of MENA mutual funds. The recent boom in Islamic finance, especially the titanic growth in sukuk issuance, fanned the flames of industry expansion in 2012, which continued until the first quarter of 2013.
At least 50% of newly launched funds in the MENA region during the period invested in Shariah-compliant assets. In the first months of 2013, fund managers also showed growing interest in equities, especially in the GCC where stock markets witnessed upbeat performance in 2012. More volatile markets such as Egypt remained on the sidelines.
The GCC markets benefited from generous government spending schemes that target the education and the healthcare sectors. In the midst of the global financial crisis, Gulf countries’ fiscal system showed strong resilience while their non-oil GDP also grew at a faster pace.
Economic diversification in the GCC has resulted to new opportunities for investors and increased the region’s potential as one of the world’s most significant emerging markets. In addition, GCC stocks traded at a 6% discount rate compared to other emerging markets, making the oil-rich Gulf bloc an appealing destination for investors.
Equity market outlook
The MENA funds industry will likely witness an increase in inflows into regional stock markets if Qatar and the UAE are included in the MSCI Emerging Markets Index. Saudi Arabia, the biggest stock market in the region, could be the main source of fund inflows if it opens its stock markets to foreigners. The kingdom’s sheer market size and existing regulations make it a very strong candidate for the MSCI index as well.
Meanwhile, the delisting of some big companies in the Egyptian stock market may threaten the country’s position in the index. Egypt has not quite shaken off the Arab Spring trauma and continues to suffer from unstable political climate, which puts its funds industry at risk.
In Morocco, the lack of stock market liquidity could lead to the country being downgraded from its status on the Emerging Markets Index (EMI) to the Frontiers Markets Index (FMI). While this might appear as a setback for the Moroccan market, it can also open up other opportunities. For example, fund managers targeting markets under the FMI could pour their resources into Morocco, helping the country’s stock market to become more liquid.
Meanwhile, the fixed income industry is another segment that appears promising. Since 2011, the industry has been recording growth, thanks largely to the issuance of sovereign, quasi-sovereign and corporate debt instruments that offer more investment opportunities to fixed income funds.
Oil price fluctuations, however, could put pressure on regional GDP and stock market performance, especially for listed companies operating in the oil and gas sector.
In order to prevent shockwaves in the future, petrodollar-rich GCC countries must accelerate the diversification of their economies and adopt knowledge-based economic models, which can create more value-added products. GCC countries must likewise reform regulations to create a smoother investment process and allow foreign direct ownership in stock markets.
In the midst of the political unrest it suffered in recent years, the MENA region remains an investment magnet – capable of luring investors to its shores, thanks in part to a plethora of diverse lucrative opportunities.
Hussam Muhieddine is senior research analyst at the Mutual Funds and Private Equity division of Zawya Investment Monitors.
