The Middle East and North Africa (Mena) region can offer investing opportunities for investors who can take a bigger picture and have a time frame of five years and beyond, says Mark Krombas, fund manager of Societe Generale Asset Management (SGAM). Year-to date, the broad regional index has gained 14.8%, but the sell off that took place in 2H2008 has left valuations at the much oversold level, opines Krombas.

“Investors were caught up in the global contagion that caused a huge shift in expectations and outlook. The markets over-reacted because they are still immature; as a result, the markets lost four to five year’s gains due to unprecedented sell off in just four months. Hence, with today’s price and valuation, we think that there’s greater chance that the regional markets will rise than test new lows.”  The main drivers for the good long term returns across the region are the oscillating oil prices (above US$ 40 per barrel), improved investors’ sentiment and optimistic corporate fundamentals, says Krombas in a media briefing organized by CIMB-Principal Asset Management Bhd. 

 Krombas notes that the region has 200 million people with an attractive demographic, where half of the population is under the age of 20, particularly in Saudi Arabia. “This highlights that the consumer demand will be there and the governments will continue to address issues like education and job creation, which relates to infrastructure spending.” The region is also still an early stage asset class, where there is still not much research done, he adds. 

Given that the region and its currencies are US dollar-linked, how will an expected depreciation in dollar affect the region? “With a weakened dollar, though there will be some translation loses for its assets and investments, the oil prices will rise and provide earnings on the revenue side. Therefore, the region has somehow got the ‘hedge’ against the movement of US dollar,” opines Krombas. “Moving forward, the risk factors are the risk of falling oil prices (below US$ 40 per barrel), political uncertainty and geopolitical tensions.”  

Currently, the regional markets that Krombas favors are Abu Dhabi, Dubai, Qatar and Saudi Arabia, and he is significantly underweight in Kuwait. In the wake of the financial crisis, Dubai has been the limelight with significant corrections in its real estate market and slowdown in activities. Nevertheless, Krombas stresses that Dubai still has a long evolution path and holds strategic advantages, and the country is just experiencing a small hiccup.   The fund that he manages, SGAM Ocean MENA Opportunity is the target fund for CIMB-Principal Mena Equity Fund (launched Febuary 2008). Year-to-date, the target fund has a positive return of 14.26%. The team has been making short term shifts in the portfolio from financials to industrial sectors. Its current largest holding is Qatar Electricity and Water Co. Krombas foresees a rapid dividend growth from the stock once it comes to the end of its capital expenditure, where it will start collecting risk-free cash.