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Long-term investors return to Middle East
16 May 2014
The region’s investment prospects are looking increasingly attractive, BNY Mellon’s Peter Gotke tells Stephanie Baxter
Long-term foreign investors are starting to return to the
Middle East as the region's outlook strengthens,
according to Peter Gotke, managing director in BNY
Mellon's depositary receipt (DR) business.
Many investors pulled out in 2010 as political turmoil hit
several countries, known as the Arab Spring, undoing the
positive allocation flows enjoyed by the region. This trend is
starting to reverse due to several factors, including the
increasing openness of companies to foreign investors, with the
exception of Saudi Arabia which is a closed market.
"We starting to see some of the longer-term investors coming
back to the region," said Gotke.
"Companies have done really well in the past five years to
focus on reaching out to new investors. Longer-term investors
tend to take longer to come in but once they tend to be a bit
He added that companies have implemented "strong" investment
relations philosophy over the past few years, which has made "a
real sea change."
Gotke called the trend towards higher foreign ownership a "very
healthy" one and said it was partly down to the decision by
MSCI to upgrade the UAE and Qatar from frontier to emerging
market status, which will be effective from June 2.
"A lot of companies are increasing foreign ownership to take
advantage of the fact that emerging market funds are coming
The upgrades have obvious benefits for the UAE and Qatar but
are also expected to have a positive impact on the rest of the
region. Fund managers are in the process of adjusting their
portfolios to reflect the reclassifications.
"The UAE and Qatar have been recovering and [the upgrades] have
really added to the momentum. In the past 12 months we've seen
a lot of active funds starting to invest and rebalance their
portfolios and when upgrade happens on June 2 we probably will
see the passive funds starting to adjust their
The UAE has seen a big rebound in confidence, with Q1 daily
trading volumes up around 400% year on year. Average earnings
year on year are up about 24%, which signals a "very strong
Kuwait, which MSCI classifies as a frontier market, will profit
from the reallocations, said Gotke: "As funds tracking UAE and
Qatar start to pull out from frontier markets, Kuwait will be
one of the major beneficiaries of where they reallocate those
He added that Bahrain and Oman are also experiencing more
positive investor sentiment.
Egypt continues to suffer from political uncertainty amid
outbursts of violence and a forthcoming presidential election.
Gotke, however, says "don't write Egypt off". Despite negative
headlines, "when you speak to companies and the exchange things
are getting back into a pretty good groove."
"With a population of over 80million people, regardless of
what's going on in the region or the wider world, there is a
real economy on the ground and conditions are improving. A lot
of the big companies and banks we work with are showing some
His firm has seen foreign investors coming back to Egypt,
mostly through depositary receipts rather than the exchange.
The local exchange closed for seven or eight weeks during the
country's revolution three years ago, which was "really bad"
for the market and led investors to be reluctant to risk going
through the exchange.
"The sentiment now is that if you want to invest in Egypt you
probably want to do it through DRs because as well as getting
in you can get out if you really want to. So it's a sanitary
tail for Egypt."