In the Europe, Middle East and Africa (Emea) region, Eastern Europe and the Middle East have not been popular destinations for equity investment this year. But Africa is garnering more interest for various reasons.
The spotlight has been on South Africa because of its position as the continent’s largest economy and the host of last year’s football world cup. But Fedra Dell'Aquila, investment director for global emerging markets at Prudential Asset Management in Singapore and manager of the Emea fund, is more bullish on Egypt.
“Egypt is a better growth story [than South Africa],” she says. “It’s very leveraged to the EU recovery – it exports a lot to the EU and the Middle East. So it’s leveraged to global growth, and therefore has seen a strong recovery this year." (MSCI Egypt in US dollars is up 11% this year, and the country accounts for 2.5% of the MSCI Emea Index.)
Dell’Aquila also cites the country’s strong urbanisation trend, thanks to the huge and very young population, as well as the cheap labour available. As a result, she has been overweight Egypt since the inception of the Emea fund in November last year.
Another market Dell’Aquila likes is Turkey, which forms around 20% of the Emea fund, as compared with 10% of the MSCI Emea index, and whose stocks have gained 44% in dollar terms year-to-date.
Two-thirds of the exposure to Turkey in the MSCI Emea index is to banks, notes Irmak Surenkok, Singapore-based portfolio specialist at Prudential AM. "Banks and consumer stocks have performed very strongly this year thanks to the low-interest-rate environment," she adds.
But what about future prospects, particularly in light of issues such as Turkey’s potential EU membership? “[The development towards EU membership is] a very long-term work in progress,” says Surenkok. “Both Europe and Turkey recognise that. In some ways it’s helped Turkey make progress with policy implementation.”
She says Turkey has already met many of the criteria required for EU membership – for example, its fiscal situation is stable and it hasn’t encountered many of the problems that its neighbours have during the crisis. “In that sense, Turkey is committed to progress,” adds Surenkok, “but everyone recognises it’s a long process.”
Meanwhile, Dell’Aquila has not yet invested any of Prudential AM’s Emea fund in the Middle East. “The Middle East would be off-benchmark for me, so I still am not allocated there yet, but we’re looking at it,” she says, adding that she will only invest there when the region looks more attractive.
That said, Dell’Aquila notes that there are Middle East markets that are performing strongly, such as Kuwait, Qatar, Morocco and Tunisia, although accessing them is not easy.
The largest economy in the region, Saudi Arabia, has not performed so well; its stock market has been about flat this year and it is on a price/earnings ratio of about 15 times for 2010.
Still, once it's more easily accessible to foreign investors, it will prove an important opportunity, says Dell'Aquila. Saudi Arabia is a very deep market, while other Middle Eastern countries’ stock indices are dominated by banks, construction and telecoms companies.
For the time being, however, foreign investors can only own the Saudi market via swaps.