MENA Q1 Outlook 2018

At first glance, Middle East equities’ performance in 2017 was disappointing, especially when compared to emerging or even developed markets. The S&P Pan Arab Index returned a mediocre 2% gain last year compared to 34% for the MSCI Emerging Markets Index and 20% for the MSCI Global Equities Index. Not only did MENA equities underperformed the rest of the world, but the volatility was fairly higher than in the rest of the Emerging markets.

These poor risk-adjusted results can be explained by continued uncertainties regarding oil prices, a difficult agenda (Qatar blockage, GCC fragmentation, Lebanon, etc.), concerns over capital flight from Saudi and the fact that GCC GDP growth has been among the weakest in the World last year. With Saudi Arabia in recession and a soft UAE growth, the GCC weighted real GDP growth in 2017 might end up just around 0.5%, far away from the 3.5-4% projected growth for World GDP. There is no doubt that this lackluster growth rate had some impact on regional company earnings and equity multiples.

That being said, we believe there are also reasons to be cheerful when looking back at 2017. First, ongoing supply cuts by top producers OPEC and Russia seem to work as International benchmark Brent crude futures ended the year with a 17 percent rise. The recent strength of energy will probably help GCC countries to ease their fiscal policy in 2018, as explained in our 2018 outlook. Another reason to look at 2017 from a positive angle is what we have been witnessing in terms of structural economic, social and political reforms, especially in Saudi Arabia. Indeed, 2017 will be remembered as a pivotal year towards economic diversification, new political leadership and societal changes in Saudi. While we were expecting some critical improvements, we have been truly impressed by the pace of reforms and this makes us even more optimistic for the years to come.

Last but not least, 2017 was a year full of alpha opportunities for astute managers. By sticking to our bottom-up fundamental strategy which focus on the true underlying value drivers for each company, we have been able to identify strong performers within GCCs such as NMC (+81%), Rahji Takaful (+50%), Walla (+43%) or DP World (+40%). This unconstrained and bottom-up approach also helped us to identify Egypt as an attractive value opportunity. This country was a great contributor to performance in 2017.

While the S&P Pan Arab ended the year almost flat, our stock picking helped our flagship MENA equities strategy to generate almost 19% of absolute performance after fees last year. Ironically, while MENA equities was among the worst performing region last year, our MENA equity fund performance is pretty much in line with the S&P 500 and the MSCI World performance. This shows that investing into stocks rather than indices can be much more rewarding for asset allocators.

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