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IT Insider: After Egypt - the outlook for MENA trusts
by James Carthew on Feb 24, 2011 at 00:00
The turmoil in the Middle East and North Africa (Mena) is into its third month and it is hard to tell if we have seen its peak. Revolution in Tunisia and Egypt seems to be spreading into Algeria, Libya, Yemen, Bahrain and Iran, echoing the domino-like collapse of the communist regimes in Europe in 1989.
There is an oft repeated, if intrinsically distasteful, maxim that investors should buy when there is blood in the streets. Should we all be piling into African and Middle Eastern funds?
It is not an easy area to access. Mark Mobius told Citywire that his Templeton Emerging Markets funds will look to add to Egypt at the right price but this global emerging markets fund is unlikely to make any meaningful allocation to the region. In fact, it has no disclosed investment in companies incorporated in North Africa or the Middle East – definitely not the fund to buy.
None of the other generalists has much there either. Genesis had about 2% in Egypt last year and much smaller investments in Iran and Lebanon. JP Morgan has just a scrap in Egypt and nothing else in the area. Advance Developing had less than 1% in Egypt and Morocco. The problem is that, as frontier markets, these countries are off-benchmark for the big emerging funds.
Advance Frontier Markets has 34% in Africa (8.9% in North Africa including a meaningful weight in Tunisia) and 22% in the Middle East and trades on around a 9% discount to net asset value (NAV). The funds it holds in the area include EFG Hermes MEDA and Alpha Mena. The new BlackRock Frontier Markets fund is trading at a premium to asset value. It does not appear to have invested in Egypt or Tunisia but has half its assets in the Middle East with big weightings in Saudi Arabia and Qatar. Both funds have assets of around £90 million.
There is a fund that specialises in Qatar (which has avoided any unrest so far) – Epicure Qatar Equity Opportunities. The local exchange had a good run after they were awarded the 2022 World Cup – but it seems a bit early to get excited to me. The £150 million fund trades on a 15% discount.
There are a couple of pure plays on Egypt. The Egypt Investment Company, listed on the Channel Islands Exchange but currently suspended, is a £50 million fund managed by Concord International. Lazard Egypt Trust is also small, with assets of around £35 million, has a much better track record than the Concord fund and looks healthy relative to the local index. Egypt had a great year in 2007, fell back sharply as the credit crisis hit, bounced in 2009 and has been fairly flat since.
The Egyptian exchange has been shut since January 27 and it will be interesting to see what happens when it finally reopens. A US-listed exchange traded fund has been trading at a large premium to NAV as US investors try to buy into a post-Mubarak bounce. Egypt Trust may also be trading at a premium but, with the published NAV based on pre-suspension prices, it is anyone’s guess whether this is really the case or not. Any initial euphoria may prove to be short-lived. Many of the stocks traded on the exchange have been linked to alleged corruption with the ousted regime and a new administration may seek to penalise them but the real worry is the state of the underlying economy.
Rampant inflation was one of the triggers for the unrest and this still has to be tackled. The experience in Tunisia, when the stock exchange reopened after a two-week suspension, was that after an initial fall, stocks climbed only to fall back again.
I cannot help feeling that, in terms of stock markets, we may not have seen the worse yet but perhaps this is just a sign of my natural caution and it is time to start building a position in one of these funds. The best bet, if you are tempted, is probably one of the frontier market funds.
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