The United Arab Emirates and Egypt are the Middle East stock markets poised to perform best in 2017, said Bassel Khatoun, Franklin Templeton Investments’ chief investment officer for Middle East and North Africa equity. Mr Khatoun, who manages US$87 million in stocks from the region out of Dubai, gave his calls on key markets in the region next year in a December 19 interview.
United Arab Emirates: Overweight
Areas like tourism, finance, hospitality, trade should continue to grow. And the Expo 2020 in Dubai will serve as a concrete deadline for a lot of that infrastructural spending. Most of the liquidity issues in the country will be overcome, and the banks are operating quite healthy balance sheets. Its growing size on MSCI EM will also continue to attract investors.
It is fair to say that Abu Dhabi is more exposed to oil prices, however, they never overstretched their spending during the boom years. They have a strong reserve cushion, and therefore the means to grow even in this environment.
Egypt: Overweight
This one is more controversial. We like Egypt because we think that, finally with the currency devaluation, and free-floating exchange rate, things will be adjusted. It has fantastic demand and a growing population, but since 2011 it has suffered from a lack of dollar availability and from security issues, resulting in a drop in tourism. We think that will change now. With the IMF funding, and the $12 billion it is getting now, we think there is an opportunity for Egypt to come back to those very high growth levels that it used to have between 2003 and 2008.
Saudi Arabia: Underweight
In the short term, Saudi Arabia’s struggle is in implementing a very ambitious reform program while not crippling growth in the economy. We are encouraged in the longer term by steps taken to improve non-oil revenues, to improve transparency, to increase share of private sector, to lower unemployment, to list Aramco. However, that will bring challenges to profitability initially. Areas that are more exposed are those related to construction and that have high degree of subsidies, such as energy. Those that are domestically driven, such as consumption, tend to suffer as well.
Qatar: Underweight
It is an interesting case. A lot of the macro drivers are quite favorable: a better growth story than a lot of economies in the region; the 2022 Fifa World Cup; a budget breakeven. It is very well cushioned in a regional context.
However, there is a lack of diversity within the Qatari stock market, as most of the market is represented by financials. And lenders continue to suffer their own headwinds. Liquidity in Qatar has been challenged by the government drawing down deposits, and what we have seen in Qatari banks in the last year has been an increased reliance on non-resident deposits. We don’t see that valuation has contracted enough to make it appealing.
Kuwait: Neutral
We moved to a neutral position from being underweight in 2016. The trajectory has been quite positive. One of the key factors is infrastructure spending: that has started to happen. A fairly attractive market and some capital market reforms are trying to make it move from Frontier to Emerging Market. It has positive signals, but we remain neutral.
North Africa: Underweight
We look at Morocco and Tunisia, and both are expensive. Morocco has had a very strong rally this year, driven by real estate and banks. It trades at close to 16 times or 17 times earnings, which is close to developed markets, and it doesn’t compensate with an attractive growth profile. Banks are still dragging their feet in terms of lending, and economic activity is subdued. In Tunisia, there are major difficulties in reducing unemployment.
* Bloomberg
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