ING Investment Management is planning to launch a fund to invest in frontier-market equity and debt in the next quarter, says Farah Foustok, Dubai-based chief executive and chief investment officer for the Middle East.
The firm is one of the few global investment managers with an investment team in the Gulf, along with Schroder Investment Management and Franklin Templeton, which has a 40% stake in Dubai-based Algebra Capital. Foustok oversaw the firm's maiden product launch, an Arab-country equities fund that debuted in December 2008.
She says ING IM is also keen to roll out a long/short fixed-income fund for the Middle East & North Africa (Mena) markets, using credit default swaps and other tools to hedge against downside risk. The firm is still gauging investor demand, adds Foustok, from within the region and from Europe and Asia.
The region's bond markets are relatively undeveloped. Only last year did some Gulf states, such as Qatar, begin to develop a long-term yield curve or introduce electronic trading for bonds, as has occurred in Saudi Arabia.
In 2007 and early 2008, Mena and in particular the six nations of the Gulf Cooperation Council attracted investment from Asian institutions and retail investors, but those flows dried up following the Lehman Brothers collapse in September 2008.
The de facto default of Dubai World unit Nakheel's international debt, and the dispute between Saudi groups Al Gosaibi and Saad, have since dealt a blow to the region's reputation. Investors were starting to discern between, say, Gulf markets versus Egypt versus the Levant, but high-profile problems have set back this understanding.
Foustok acknowledges that Mena and the Gulf are currently out of fashion. But she also argues that bank and corporate balance sheets are getting cleaned up. "What's the health of corporate balance sheets globally? They've been bailed out and had to cut costs everywhere," she says. "Where in the world is there still economic growth?"
She says the Middle East, and the Gulf markets in particular, continue to offer growth, thanks to oil and natural gas. Liquidity is still flowing to their capital markets, and government policies continue to drive economic development. Foustock says the region offers investment stories in areas such as shipping and fertilisers, in addition to the well-known theme of natural resources.
Moreover, Mena markets will benefit from the overall shift of interest among global investors to emerging markets. Mena countries comprise more than half the market capitalisation of the MSCI Frontier Markets Index, although in some cases -- Saudi Arabia is a case in point -- can only be accessed synthetically.
Having already launched a Mena equity long-only product, the firm has decided to add a frontier-market fund to the mix and include corporate bonds as a component. Foustok's research unit already helps the firm's global emerging-market debt team with Mena sovereign and corporate issues.