363d8aaa1e688210VgnVCM100000e56411acRCRDapproved/thenational/Articles/Migration/2009-Q1Invest in areas that MENA will not allow to fail263d8aaa1e688210VgnVCM100000e56411ac____Invest in areas that MENA will not allow to failThe past year has proved to be one of the worst financially for the MENA region.<p>The past year has proved to be one of the worst financially for the MENA region. Equities, currencies, commodities, credit, real estate and any asset for that matter, witnessed massive volatility and caused significant stress to the markets.
In attempts to stabilise the financial system, monetary authorities pumped liquidity through various measures, while governments recapitalised banks and corporations in some cases, and took them over in others, all primarily to no avail. Investors still reeled from losses, corporations and banks resorted to alternative, and much less successful, ways of financing, and funds witnessed redemptions at a level not seen before.</p>
<p>As we go well into 2009, the global theme is nationalisation, and the MENA region will likely be no exception.
This means governments will put their weight, through recapitalisation, or providing cheap financing, among other measures, behind institutions whose failure would pose systemic risks. In addition, institutions that these governments have strong interests in will likely receive the same treatment. We view fixed-income investors to be the best beneficiaries of any such measures. As it stands today, more than half the issuers within the fixed-income tradable universe in the MENA region are either government entities or government-related entities (by "government related" we mean entities with significant direct or indirect government ownership). Most of these issuers, we believe, are poised to receive the necessary support when it becomes necessary.</p>
<p>MENA governments have already shown a swift response to the credit crisis through different measures - Saudi Arabia, UAE, Bahrain and Kuwait were quick to guarantee bank deposits and interbank lending. Liquidity injections into the banking systems were fairly rapid, with the UAE injecting US$13.6 billion (Dh50bn) in deposits with another US$5.5bn still to be injected. The Qatar Investment Authority is launching a plan to recapitalise banks through a US$5.3bn purchase programme of 10 per cent to 20 per cent of their share capital, and Dubai is raising US$10bn through a bond offering subscribed by the Central Bank of the UAE.</p>
<p>The MENA fixed-income market is still relatively young - the investment universe has a market capitalisation of approximately US$64bn and an estimated average daily traded volume of US$25m to US$50m. According to Lipper data cited by The Financial Times, there are only 17 fixed-income funds in the region, with assets under management of US$558m. This compares to 224 equity funds, with assets under management of US$17.6bn. Redemptions, however, reached only 5 per cent for fixed-income funds in 2008, compared to 45.8 per cent for equity funds in the same period.</p>
<p>Regional fixed-income instruments are offering very attractive opportunities to investors. Risk aversion and global deleveraging has sent yields sky-high and prices plummeting. Credit spreads currently imply around 55 per cent default rate over the next six years, the average maturity of the investible universe, for a region with issuers of high quality and historically low defaults. The median rating of the region's bonds is BBB+, and most issuers are government or government-related companies.</p>
<p>These governments, unlike other emerging markets (and developed markets today, for that matter), are well capitalised, having amassed significant revenues from the sky-high oil prices that prevailed until mid-2008. They have close-to-balanced budgets, strong ongoing oil revenues and significant foreign assets. These Governments we believe, have the necessary ammunition to support their economies during the economic downturn.</p>
<p>Compared to other emerging markets, the MENA region's average yield of around 12.5 per cent is higher than Latin America and Asia ex-Japan, but lower than Africa and Eastern Europe, two regions with considerable default rates. Considering the investment-grade median rating of the MENA bond universe, the strong fiscal positions of governments and high currency reserves, the investment opportunity at hand is significant.</p>
<p>The secondary market for fixed income is still relatively illiquid compared to equities. Liquidity, however, is set to improve with the growth of fixed-income funds in the region and as markets start to recover.
Further debt is expected to be issued as volatility decreases, although this is not likely until the second half of 2009, and should provide an additional catalyst for liquidity.
Among all the bearish views in the market, fixed income offers investors equity-like returns as the sector sits higher up in the capital structure and waits out the current crisis.
<i>Ziad Shaaban is the head of fixed income for EFG-Hermes Asset Management.</i></p>