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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

Read more: Middle East

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 more sticky."

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 in."

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 portfolios."

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 recovery".

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 funds."

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 good numbers."

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."


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