S&P Fund Services: Optimistic Middle East fund managers riding oil price and booming markets

"Some of the regional markets experienced volatility following sharp gains in April," said S&P Fund Services analyst Irina Schoenberg, pointing to Saudi Arabia, where stock prices fell across several sectors, resulting in a drop of 13.7% YTD. Oman was the best performing market with a return of 27.9%, followed by Qatar (24.1%), gaining from interest from foreign investors plus a robust earnings growth outlook. Kuwait (19.6%) and Abu Dhabi (13%) also registered double digit returns.

"Regional and international investors generally remained cautious and in a profit-taking mode in the absence of any positive newsflow,"

said Schoenberg, noting that mixed signals regarding improvement in the global economy and stock markets had led to a more cautious undertone in the markets.

On the more bearish side, high inflation and uncertainty surrounding government macroeconomic policies continued to affect the performance of the Egyptian market, which lost 6.2% in May 2008 (+5% YTD).

Overall, the fund managers interviewed by S&P Fund Services remain optimistic on the outlook for the region.

At EFG-Hermes in Dubai, the team sees the macroeconomic fundamentals for the region as robust, with oil prices near $140 a barrel. This is driving investment and infrastructure spending, which is being reflected in earnings growth. With Gulf Cooperation Council (GCC) countries planning their fiscal budgets on $55 per barrel, the team feels there is a significant buffer should oil prices soften. The only concern is inflation: with most GCC currencies pegged to a weak dollar, inflation has been rising to record levels, partly under the influence of commodity price rises and partly because of what is effectively imported inflation, as central banks mimic the US Federal Reserve rate cuts.

The team at EFG-Hermes believes infrastructure spending will continue unabated and is therefore favouring real estate and materials, in addition to the petrochemicals sector which has benefited from access to cheap feedstock. In terms of country allocation, the UAE and Saudi Arabia remain the favoured markets, while they also like Kuwait, Qatar and Egypt on a more selective basis.

A number of managers said they were cutting their allocation to Egypt in the wake of the recent volatility in the stock market. However, Cairo-based Dalia Shafik, who runs the S&P AA rated EFG Hermes Egypt Fund remains optimistic. She has recently focused on fertilizer, oil and real estate companies, believing that a real estate boom lies ahead in Egypt. She notes that Egypt's GDP growth of 7% is one of the highest in the region and says valuations are reasonable with an average PE ratio of 11. Inflation, which was at 19% in May, is expected to peak within the next two months.