Middle East markets mature

When Saudi Arabia, the Middle East's biggest stock market, opened its doors to foreign investors last month fund managers saw the step as a milestone along the road to investment in the region.
"The Middle East has become a viable investment region," says Hashem Montasser, head of asset management for EFG-HermesEFG-Hermes
. Restrictions on foreign ownership levels in companies listed on the region's bourses have been the biggest deterrent to outside investment. Now he hopes, "other markets may follow suit".
Mr Montasser, who has been based in Dubai for the past three years, has seen the investment landscape change as investor interest in the region has grown. "It has become more competitive with an increasing number of firms setting up base," he says.
Research on the Middle East by big international groups such as Deutsche, Merrill Lynch and JP Morgan has also grown, he adds. Many of them, like EFG-HermesEFG-Hermes
, have set up offices in Dubai, and in the next few years he expects to see more players set up on the ground.
has a head start on some of the newcomers. It began as an Egyptian-based investment bank in 1984 before broadening its horizons to the wider Middle East about 10 years later and building up an asset management arm. It also has a private equity business and securities brokerage.
Mr Montasser, who moved from JP Morgan where he focused on the Middle East, was taken on in 2005 to build up a regional business in the Middle East. "We spent a year or so just building the platform, the infrastructure, operations, and research capabilities," he says.
Since setting up the first fund, the Meda Fund in 2005, assets under management in the region have grown from $50m to about $3.5bn out of $8bn total assets at EFG-HermesEFG-Hermes
. In the past few years Mr Montasser has built teams in Egypt, United Arab Emirates, Saudi Arabia and Qatar, focusing mainly on institutional investors.
With an eye to becoming more than a long-only player in the region, Mr Montasser set up one of the first hedge funds a year ago in partnership with the Harvard Endowment Fund. "As Middle East markets become more mature, investors will invariably seek alternative investment products that can offer high risk-adjusted returns through different market cycles," he says.
The Mena Opportunities fund, which has a long/short mandate investing in both liquid and illiquid securities in the Middle East and North Africa, has raised $1bn assets since inception last September and delivered net consolidated returns of 31 per cent to the end of July.
One of the reasons Harvard was keen to enter the region was "for good buying opportunities because of mispricings", says Mr Montasser, a former Harvard graduate. But such opportunities will decrease as research coverage increases, he adds.
The most interesting stock market in the region from a valuations perspective currently is Saudi, he says. "The market is down almost 30 per cent to date. It's trading at 13 times 2008 earnings and probably 11-12 earnings, so is very attractive."
He also sees good opportunities in the Dubai and Abu Dhabi markets, although he believes Dubai's real estate sector is overheated. But any correction in Dubai's real estate market will be "a soft landing and not a crash", he maintains. He also believes smaller markets, such as Qatar, a country with huge gas reserves, are worth watching. Market sectors of interest in Qatar are petrochemicals, banks and real estate.
Although each country in the region differs in terms of stock market liquidity, openess to foreign investors and corporate governance, there is still a tendency for investors "to lump" the Middle East and North Africa together as a bloc. But as they get to know the region better "they will begin to follow individual countries".
More interest in the region is coming from endowment schemes than pension funds. "Endowment foundations and big family wealth groups tend to have a more innovative [investment] approach and move faster than pension funds," says Mr Montasser.
The credit turmoil and recent investor flight from emerging markets such as India and China have eroded some of the strong interest in the region six months ago, he says.
"Some investors have simply postponed committing themselves to the region for the moment but there is still more appetite than two or three years ago."
Despite the recent fall-off he is still seeing interest from European and Scandinavian pension funds.
There is also growing investor demand from Islamic investors in the region and from Islamic Asia.
Mr Montasser, who says Islamic commercial banks are slow to roll out products, is planning to launch a long-only equity fund that complies with shariah requirements by the end of the year. He expects one of the ripple effects from Saudi's opening to foreign investors to be "more markets entering the MSCI Emerging Markets Index".
Currently Egypt, Morocco and Jordan are there "but if Kuwait, UAE, Qatar and, especially Saudi, are included in the future "any benchmark fund will have to look at the region".