Gulf growth seen outpacing other emerging markets

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The region is under-represented in global portfolios, mainly because just three MENA countries belong to the MSCI Emerging Markets benchmark index.


MANNHEIM, Germany, Jan 28 (Thomson IM) - Economic and corporate earnings growth in the Gulf region looks set to outpace other emerging markets, making Gulf stocks attractive, two equities fund managers said on Wednesday.

'The Gulf's macro (economic) outlook is positive, especially compared to other emerging markets,' said Birgit Ebner, manager of Frankfurt Trust Asset Management's 45 million euro ($59.5 million) Emerging Arabia fund.

'We are convinced about the GCC (Gulf Cooperation Council) region's growth prospects and corporate profit prospects,' Ebner told a mutual funds conference in Germany.

'Investing in equities only makes sense if you believe in growth,' said Joe Kawakabani, manager of Franklin Templeton's $40 million MENA fund, which invests in stocks of Middle East and North African (MENA) companies.

The market value of MENA equities at about $780 billion is on a par with India and higher than South Korea, he said, noting that the region is under-represented in global portfolios, mainly because just three MENA countries -- Morocco, Egypt and Jordan -- belong to the MSCI Emerging Markets benchmark index.

The Gulf Cooperation Council countries -- Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Bahrain and Oman -- would continue their extensive government-financed infrastructure projects, Kawakabani, who is based in Dubai, told the conference.

'Government spending is the main growth driver. That is good in the current environment,' he said.

Growth in the GCC area would slow as a result of the global recession but remain clearly positive. Contrary to many other nations, the GCC countries have no financing problems thanks to hydrocarbon revenue piled up over the past few years, he said.


PROFIT GROWTH

Kawakabani said he favours a value-based investment strategy, which currently focuses on defensives such as infrastructure, fertilisers and selected home-market focused consumer goods companies.

Ebner, too, said infrastructure spending would underpin GCC growth, estimated by the International Monetary Fund at 3.5 percent this year. She forecast 15 percent earnings growth for GCC companies in 2009. In most countries elsewhere, analysts expect profits to shrink.

Both fund managers pointed to extremely low valuations -- around 7 times projected 2009 earnings -- for Gulf stocks after last year's rout, which saw the MSCI Arabia index fall just over 50 percent, underperforming world equities, which lost just over 40 percent.

Like most emerging market funds, both Franklin Templeton's MENA fund and Frankfurt Trust's Emerging Arabia fund suffered net outflows during the global financial markets turmoil sparked by the mid-September collapse of U.S. investment bank Lehman Brothers.

Franklin Templeton and its Gulf partner Algebra Capital saw net outflows of $200 million, bringing assets under management in the region down to 'around $300-400 million,' Kawakabani said.

The Emerging Arabia fund shrivelled to 45 million euros from 400 million euros amid the stampede, which saw investors withdraw an estimated total of $50 billion from emerging markets funds worldwide, Ebner said.

'We had to sell (stocks held by the fund) to meet redemptions,' she said. 'But it has stopped, we have no outflows now. And investors are still interested in emerging markets.'

Ebner said she expects Saudi Arabia to open up its stock market for foreign investors 'in the foreseeable future' and Kawakabani said there was talk of Kuwait, Qatar and United Arab Emirates being included in the MSCI Emerging Markets index.