Complex Made Simple

The Middle East enters a new investment reality as emerging markets are no longer perceived as uniform

Investors have become more discerning about investing in emerging markets as they witness economies recovering at different rates, showed findings from the annual independent survey released by CREATE-Research and commissioned by Principal Global Investors, a diversified asset management firm, and its parent company, Principal Financial Group®.

The report, titled ‘Not All Emerging Markets Are Created Equal’, discusses the extent to which emerging economies and developed markets will converge or diverge throughout the rest of this decade. It seeks to understand how emerging economies resemble their developed peers, in terms of economic well-being and investment approaches, and analyses what factors are likely to affect convergence.

The fabric of emerging markets has changed with the inclusion of the United Arab Emirates and Qatar into the MSCI Emerging Markets Index. With the anticipated increase in institutional investors, the need for alternative investment instruments has become apparent in line with greater market sophistication. Nevertheless, the CREATE-Research showed that Middle East investors still remain focused on core asset classes, such as real estate, private equity and actively managed funds. In addition, the growth in awareness of Exchange Traded Funds (ETFs) is also gaining traction, but only with investors focused on opportunistic strategies.

For a majority of emerging markets investors surveyed there are two critical drivers of asset pricing: slower economic growth (62% of respondents) and the US Federal Reserve’s tapering programme (53% of respondents), which is expected to continue to cast a long shadow around the globe. Both factors are expected to increase volatility and promote opportunism, increasing the propensity for investors to view and use emerging market equities and bonds as part of a tactical investment, rather than the strategic ‘buy and hold’ allocation of just two years ago.

Wassim Nasrallah, Managing Director, Head of Middle East at Principal Global Investors, commented, “Economic performance and US monetary policy may be expected to depress market valuations in the short term, but pockets of under-valuation will prevail in all markets. Investors believe that volatility will likely become even more of a unifying theme, therefore, guidance from high conviction specialist managers will be even more necessary. This could well be the age of the stock-picker.”

The report also highlighted that nations within emerging and frontier economies are increasingly starting to showcase unique attributes that work against geographical correlations. Dubai is emerging as a regional logistics and tourism hub, whereas Saudi Arabia has shown a trend towards petrochemicals, and India in defence equipment.

Professor Amin Rajan, CEO of CREATE-Research and the author of the report, said, “While emerging markets in the East continue to converge with developed markets in the West, it is clear from our research that they themselves will no longer move in lock step. Emerging countries, with their youthful populations and historically strong GDP profiles, will follow different trajectories over the rest of this decade as each market develops a more unique identity and reform fingerprint. At the same time, frontier markets around the world will continue to excite investors because of their lower correlation with Western markets, favourable macro-economic potential and illiquidity premia.”

The findings are based on a survey of more than 700 pension plans, sovereign wealth funds, pension consultants, asset managers and fund distributors across 30 countries with a combined AuM of US $29.7 trillion. The survey was followed by 110 interviews.

The full report is available at: create.principalglobal.com and www.create-research.co.uk.

For further information, please contact:
Manal Shaikh / Lukasz Gwozdz
+971 (0) 4 367 6158 / +971 (0) 4 427 6474
mailto:[email protected]
Capital MSL (on behalf of Principal Global Investors)