October 2010

NORTH AFRICA: Out of Africa

africaOver the past decade fund manufacturers, both in the West and Middle East, have created and distributed their own versions of Mena funds. However, most of these funds have been overweight to the Middle East and lacking in the North Africa ingredient. Why it is that North Africa has been neglected at the expense of the Middle East? It’s all a matter of semantics – where does the Middle East start and where does it end?
The Middle East is divided into roughly three sectors, the Maghreb, the Levant and the Arabian Peninsula. The Maghreb, or ‘place where the sun-sets’, includes modern-day Morocco, Algeria, Tunisia, Libya, Mauritania and the disputed territory of the Western Sahara. The Levant, a French term, is commonly used to describe Palestine, Lebanon, Syria, Jordan, and Iraq, and to a lesser extent Egypt and Israel. The Arabian Peninsula encompasses the Arab nations of Kuwait, Bahrain, Qatar, and the UAE on the east, Oman on the southeast, Yemen on the south and Saudi Arabia at it centre.
However, the Middle East – depending on who you talk to – can also include Iran, Afghanistan, Cyprus, Turkey, Pakistan, the Caucasus and Central Asia. As for the ‘Arab World’, this terminology can be extended all the way down the east coast of Africa and across the Indian Ocean. Moreover, the original Arab travellers influenced people as far away as the Philippines, Indonesia and Malaysia.
The whole concept of the ‘Middle East’ was a term first believed to have been used by the British India Office in the 1850s, to describe the bit of the world that came between Southern Europe and India, and as a descriptor had a very Eurocentric tang to it. The description stuck and as a result the nations of ‘that bit before you get to Asia proper’ as a 19th century British imperialist might have put it, has stuck, despite it actually meaning very little.
The disingenuous and arbitrary creation and lumping together of a group of nations by 19th century imperialists has created many problems in the modern world. In the world of fund management it has created distinct problems of identity. Laziness, or in some cases ignorance, has led to fund manufacturers trying to tie very different economies and macroeconomic drivers together, because the relativity of some of the ‘Middle Eastern’ and ‘North African’ nations is so far apart that one might try to develop a fund based on letters in the alphabet, such as a ‘B’ fund including investments in Bangladesh, Belgium, Bosnia, Botswana and Brazil.
One of the things that unifies what the modern world classifies as the Mena (Middle East and North Africa) region is its mineral wealth, high GDP and high population growth rates. It is the mineral wealth and growth profile that has drawn fund mangers to the region, as Mena has a very attractive demographic and macroeconomic story. But this story is not without its downsides.
There are stark differences between the different nations and sub-regions, which is why in many ways a truly Mena fund is destined to fail. The biggest difference is between the economies and societies of the Arabian Peninsula and the Maghreb. The former is the home turf of the GCC – or Gulf Co-operation Council – including exchanges in Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and two in the UAE. Yemen is also geographically located in the area, but because of its small economy and relative impoverishment it has not been asked to join the GCC as a full member. Fuel for thought
The GCC has lots of oil and gas; in fact the Arabian Peninsula owns 40% of the world’s oil reserves and 22% of gas reserves. However, the GCC produces only 22% of the global oil output and only 7.3% of the global gas output, so theoretically it still has a vast store of wealth and economic potential locked away for many years. The GCC has a modern infrastructure, gleaming cites and enjoys relative peace. The region is also very autocratic, with its countries run by the families of a sole ruler, and apart from Saudi Arabia, with a population of 28 million, it is mostly empty.
The people in the GCC huddle by the coasts as the interior of the sub-region is a harsh, agriculturally unproductive area. The populations of Bahrain, Kuwait, Oman, Qatar, and the UAE are miniscule and to build their cities and infrastructure have invited millions of guest workers – mainly from the Indian sub-continent and Southeast Asia – as well as many white-collar Western expats to their shores. This has seriously unbalanced the demographics of the sub-region and created problems for its indigenous people, who are often excluded from executive jobs in their own countries and choose not to do manual or blue-collar jobs.
By contrast, the countries of the Levant and the Maghreb have large, youthful indigenous populations. They also have high unemployment – something that is endemic amongst the indigenous populations across the region. The Levant and Maghreb are not as blessed as the GCC in terms of mineral wealth with a few exceptions, most notably Iraq and Libya. However, the region is cursed with political instability and low intensity and high intensity conflicts have plagued Iraq, Israel, Lebanon, Palestine, Algeria and Morocco. The sub-region has experimented with democracy and secular rule, but in most cases this has degenerated into autocratic, unstable government.
These regions’ markets vary widely in terms of maturity,; for instance, the Alexandria Stock Exchange in Egypt can trace its roots back to the late 1800s, while the Qatar Exchange only began formal activities in the 1990s. There is a broad spectrum of companies that are listed in these markets but the most predominant sector is banking.
Maria-Gabriella Khoury is sector head of Luslight’s Gems (global emerging markets) consumer team and oversees the investment research house’s coverage of the Mena region. She says: “Each market has a different set of rules and limitations on foreign ownership. What I would say differentiates these exchanges from mature, or even other emerging markets, is the way in which they react to global events. Unlike Bric [Brazil, Russia, India, China] exchanges, which are becoming more and more affected by foreign stimuli, Middle Eastern markets would tend to react more, or faster, to local or regional events versus international incidents.”
The GCC countries, primarily the UAE, were significantly affected by the global financial crisis. This slammed the brakes on the GCC’s high-octane growth over the last decade. But in North Africa, the story was different. These countries were not wholly reliant on the export of oil and had more diversified economies; hence they were able to weather the storm better. 
In many ways North Africa has more in common with the rest of Africa, or even Southern Europe than with the Persian Gulf. This does offer some advantages to fund managers as they can leverage the different regions off against each other and when one is not doing well, they can invest in the other. But this has not happened as the industry is beset by an ingrained attraction to the GCC.
The Maghreb and Levant should be a port in a storm while the GCC markets flounder. But that has not been the case. Currently the majority of equity funds investing in the region are sitting on large amounts of cash, and this would infer that the managers do not feel confident in the region – or that they are very overweight in the GCC and cannot find the right investment opportunities in North Africa.
According to Standard & Poor’s, on average, Mena funds have about 10% in cash, while some have nearly 25% of their assets in cash against a global average of 2% to 5%. Many managers talk up the prospects of the region, but don’t seem to be following their talk up with their convictions. “At the moment there is very little one can do apart from buying and holding,” comments Shehzad Janab, head of asset management at Daman Investments, which runs four funds and whose parent manages about US$1.47bn (€1.13bn) in assets. Because of a lack of sophisticated investment management tools, like derivatives, sometimes managers are forced to sit on their hands. Janab says: “I can’t short-sell and when you look at over-the-counter derivative markets, the inherent volatility in our markets coupled with the lack of sellers means pricing tends to be prohibitive.” Oil rush
Many household names beat a path to the region, hoping to cash in on what they perceived as petrodollar liquidity in the hands of a few family offices. Schroders, JP Morgan Asset Management and Fidelity all set up operations in the GCC. Some, like Franklin Templeton, even created partnerships with local fund manufacturers. In Franklin Templeton’s case, it partnered up with Algebra Investments, while others used houses such as Al Mal Capital or Rasmala Investments as advisors.
However, all these fund managers based themselves in the GCC – primarily in Dubai, and when Dubai went wrong, liquidity and confidence flooded out of their funds. Many managers remain bullish though, despite the continued underperformance of Dubai and its neighbours.
“The industry is still at a nascent stage and you will see more international names coming to the region,” said Rami Sidani, head of investments at Schroders in Dubai, in a recent interview. He said  that his $250m fund was fully invested in the region.
The dearth of the GCC has led to a renaissance in the ‘NA’ part of the equation and has forced managers to increase their exposure to Africa. African regional funds recorded net inflows of more than $480m in the first half of the year, according to fund tracker EPFR Global, an indication of investor appetite for the poorest continent.
The top-performing Mena fund according to Lipper is the Bellevue BB African Opportunities fund, which has returned about 30% in the twelve months to end-July. The fund has a relatively high cash position of 9%.
Mena funds have seen relatively poor inflows over the past 18 months, which may lead to some managers deciding to split the atom and create separate ME and NA funds and eventually put the right bits in the
right boxes. ©2010 funds global

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