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Global investors eye Middle East opportunities

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As an emerging markets investment opportunity, the Middle East and North Africa (MENA) region has been overshadowed over the past couple of years by the focus on Asia and Latin America and especial

As an emerging markets investment opportunity, the Middle East and North Africa (MENA) region has been overshadowed over the past couple of years by the focus on Asia and Latin America and especially the so-called BRIC quartet of Brazil, Russia, India and China. But with attractive prices, impressive performance and a lack of correlation with other key markets, the region is unlikely to remain a secret much longer.

Rasmala Investments, which serves institutions and high net worth individuals throughout the region, has longer experience than most in assessing the investment opportunities available in the MENA countries as well as the qualities of the asset managers active in these markets, as the manager of eight regional and global funds investing in equities, real estate and alternative investments.

In 2005 the firm launched the Rasmala Hedge Fund Strategies Fund, a multistrategy fund of hedge funds, subsequently adding a two times leveraged version of the fund, and the following year it added the Rasmala MENA Equity Opportunity fund, a mostly long-only fund of funds that uses tactical allocation to alternative strategies to optimise its risk-return profile.

For its MENA strategy, Rasmala invests with managers throughout the region, from Cairo to Riyadh. The past year has seen significant growth in the number that meet its selection criteria, reflecting new managers entering the market and existing ones developing a stronger base for their business, and coincides with increased interest in MENA investment among investors in Europe and the US.

Market valuations in the MENA region are currently very attractive with price/earnings multiples averaging around 14. Prices are particularly compelling by comparison with China and India, which although darlings of the emerging market world have become relatively expensive. At the same time, earnings growth averaging a solid 20 to 25 per cent is forecast to continue over the next two to three years.

Further, the volatility of markets in the MENA region has declined dramatically over the past 12 months, just as volatility in other emerging markets has moved in the opposite direction. Suddenly MENA markets look substantially less risky not only in relation to their own historic characteristics but against developed and other emerging equity markets.

The third factor is that markets in the region have almost no correlation to other major asset classes and markets favoured by international investors. Over the past few years, Middle Eastern equity markets have exhibited practically zero correlation to Latin America, US and other developed market equities, and only the most modest positive correlation to other emerging equity markets.

Meanwhile, Rasmala has launched Shariah-compliant versions of its Global Equity Opportunity, MENA Equity Opportunity and Global Real Estate Opportunity funds. These funds of funds use the same manager identification, selection and due diligence methodologies as their conventional counterparts but allocate to managers that adopt a Shariah-compliant investment approach, certified by a fatwa from the funds’ Shariah boards.

This investment field is growing rapidly thanks to demand from clients for Shariah-compliant products and an expansion of the range of compliant funds offered by top-drawer asset management groups. All the evidence indicates that Islamic restrictions do not incur any long-term performance penalty for Shariah-compliant funds, and there is now a wider choice of eligible underlying funds than ever before.

Eric Swats is partner and chief investment officer with Rasmala Investments in Dubai

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