Middle East Unrest to Spur Investment

(March 7, 2011) — The Middle East and North Africa (MENA) region will continue to lure investors despite political unrest, according to ING Investment Management.

The firm has asserted that unrest in the Middle East is actually expected to lead to strong, long-term growth in the region, providing “attractive opportunities” for investors. “Change has been coming to the MENA region for some time now, but no one could have predicted the current level of activity,” Head of Investments Fadi Al Said told Global Pensions. “This will create a number of challenges for the new governments.” He added that although the region’s markets are enduring short-term volatility, he believe that longer-term there is a greater chance of significant benefits emerging from the changes. “The region’s markets could follow a similar path to those in Eastern Europe after the collapse of communism. These endured volatility early on, but overall they have enjoyed strong growth,” he said.

According to the investment management group, the positive changes set to occur in many of the MENA countries with regard to political and social infrastructure could be a push for less corruption along with greater distribution of wealth. “We were one of the first global financial institutions to have an asset management team on the ground in the Middle East, and this enables us to develop strong relationships with local companies in which we invest, resulting in added value opportunities,” Al Said added.

While Standard & Poor’s, the credit rating agency, warned that contagion is a real risk for every country in MENA, Al Said urged investors to not turn their backs on the region due to ‘misperceptions,’ the UK’s Citywire reported. ‘The worst thing you want to do is trade this region on headlines,’ he said during a meeting in central London.

Earlier this month, Patrick Thomson, head of J.P. Morgan Asset Management’s sovereign wealth fund client group, indicated that he views conflict in the Middle East as non-threatening. While the spike in oil prices has rightly frightened investors, Thomson told aiCIO that as a long-term investor, conflict in the Middle East has not spurred huge changes in investment policy. The Mid-East turmoil has introduced volatility that has concerned investors, encouraging them to review their liquidity positions to ensure that if the situation continues to deteriorate, they’re protected, he said. “One of the great lessons learned over the crisis is that investors must retain enough liquidity to maintain short-term liabilities…We’re clearly affected by movements in oil prices, but the crisis impacts only a small part of the investment universe that shouldn’t affect the remainder,” he said, noting his belief that high oil prices are driven by political events as opposed to fundamental events and will thus be more short-term. And more recently, the Kuwait Investment Authority (KIA), the Gulf state’s sovereign fund, revealed that it is not considering liquidating any of its investments in Middle East North Africa region, Reuters reported.

Thomson’s comments mirror perspectives voiced from investment consultants, who are indicating to their clients that despite the current crisis in the Middle East, investors must take a longer-term approach, viewing the crisis as a natural evolution while placing greater emphasis on county-risk.

The continuing situation in the Middle East has raised a red flag for institutional investors in that they must become more aware of the issue of sovereign debt, according to Cynthia Steer, managing director of investment strategy at Russell Investments. “Conflict within emerging markets in the Middle East is part of a natural evolution,” she told aiCIO, noting that the strife puts a spotlight on the need for institutional investors to transition from focusing on asset allocation to focusing on country-risk. “This crisis is reflective of the fact that we, as institutional investors, need to move faster in understanding this.” The general position among many investment consultants is that potential client concern would likely be a result of broader worries about the volatility of equity markets worldwide as opposed to worries directly focused on Egypt, with its relatively small, anemic economy. “Egypt doesn’t have much direct exposure for our clients given the modest size of its economy and its capital markets – with the lack of Egypt’s economic success possibly being a driver of popular unrest in the first place,” said Matt Stroud, a member of Towers Watson Investment’s Global Investment Committee, responsible for the firm’s views on the economy and markets.