By Amélie Thévenet, Fund Manager, Emerging Markets, Jupiter Asset Management
Monday 15, October 2018 BY ANNUAR NABILAH
GCC markets have attracted the attention of emerging market (EM) investors. Some markets, particularly Saudi Arabia and Qatar, are emerging as a safe-haven for EM investors. Exposure to GCC equities is diversifying risks associated with emerging market strategies, and regional markets can continue to attract investors by paying close attention to risk while focusing on investor education.
Compelling market capitalisation
Emerging market investors have long recognised the region’s potential.Countries in MENA—and in particular the GCC—are undergoing significant, wide-reaching reforms aimed at diversifying their economies. In Saudi Arabia alone, the transformation initiated by Crown Prince Mohammed bin Salman under the Vision 2030 umbrella, has ignited economic growth and has had a positive impact on markets. This year, the Kingdom achieved inclusion in the MSCI Emerging Market Index—the most widely followed of all EM indices—which is likely to attract foreign inflows of as much as $45 billion.
The Saudi Stock Exchange, Tadawul’s market capitalisation stands at around $503 billion, and with a P/E of 16.75x makes it a compelling prospect for investors around the world. Other regional markets including the Qatar Exchange ($151 billion) and Kuwait Bourse ($85 billion) have earned their place on the radar of investors, albeit to a lesser degree. While investors remain interested in regional capital markets, liquidity concerns, macroeconomic and geopolitical risks, and corporate governance issues must be better managed if issuers are to maintain investor confidence.
Managing risks and educating investors
Geopolitical and security risks are front of mind for any international investor looking at emerging markets. When making investment calls, a fund manager will look at the equity story of companies as well as their market fundamentals. To satisfy investors and attract capital, MENA corporates need to integrate a range of investor education tools across their communications, to accurately and transparently convey their equity story. In the GCC and wider Middle East, a greater focus on Environmental, Social and Governance (ESG) disclosures will enable investors to understand the risks that exist for a business.
Research shows that ESG integration can help achieve better operating and financial performance. So, corporates in the region should take heed, and go to greater lengths to actively communicate ESG integration into the business model. Tools including sustainability reports and integrated annual reports will enable investors to better understand businesses in the region and put perceived risks into their proper context. The role of Investor Relations (IR) teams is increasingly important. More and more, investors are contacting companies directly, rather than through brokers, to understand a business and its associated risks. IR teams must make themselves as available as they can, and work to build trust with the investor community.
Fundamentals always come through, be selective
While the GCC equities market presents considerable opportunity to global investors, they will need to allocate and manage their capital wisely, while actively navigating a volatile investment landscape. Investors must be selective and carefully assess risk to capture opportunities in the market. Sectors showing attractive upside potential in GCC markets currently include retail, aviation, telecoms, and healthcare. Healthcare represents a particularly interesting opportunity, because of structural growth, increased focus on government spending, and a high prevalence of chronic diseases. GCC healthcare spending is projected to reach $104.6 billion in 2022—at a CAGR of 6.6 per cent between 2017 and 2022.
Furthermore, 73 per cent of deaths across the region are a result of non-communicable, and often chronic, diseases. This is a sector to watch. As GCC economies diversify their revenues and undergo material structural change, investors will look for positive changes in stocks at company, industry and country level. With rapidly-moving economic reforms, and recent index inclusions and watch list additions, the region is in the eye of international investors now more than ever. It is no accident that at the half-year mark of 2018, the Tadawul All Shares Index was up 15 per cent, as compared to the MSCI EM Index, which was down two per cent. International inflows aren’t likely to dry up any time soon, but issuers must realise that while investors will look at macrotrends, they will place particular focus on company and industry fundamentals to inform allocation.