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Abu Dhabi, UAEWednesday 27 March 2019

Fund managers’ opinions on the UAE and Qatar’s emerging markets upgrade

Fund managers in Singapore, New York, London and Abu Dhabi give their views on the MSCI upgrade.
Mark Mobius, executive chairman of Templeton Emerging Markets Group. Jeffrey E Biteng / The National
Mark Mobius, executive chairman of Templeton Emerging Markets Group. Jeffrey E Biteng / The National

Fund managers in Singapore, New York, London and Abu Dhabi answer questions related to the entry of the UAE and Qatar into the MSCI Emerging Markets Index on Sunday. The countries were upgraded from the MSCI Frontier Markets Index because of increased economic stability and improved access to international investors in their nascent stock markets.

Mark Mobius, Singapore-based executive chairman of Templeton Emerging Markets Group

How attractive are UAE and Qatar shares, given the strong rallies over the past year?

There is still value to be had in both the UAE and Qatar over the long term. Of course, many of the stocks have gone into overpriced territory but there are some that are reasonably priced, given their strong growth prospects.

Which countries offer the most attractive opportunities in the MSCI Emerging Market Index?

The best opportunities are in those markets where the news is the worst, and of course Russia ranks high on that list. Also Thailand, although not coming down very much, still has many good investment opportunities. In the Middle East region, Saudi Arabia is of particular interest for us.

Will the UAE and Qatar stock benchmarks become more correlated to the MSCI Emerging Market Index?

Yes. The UAE could become more correlated to the MSCI Emerging Market Index, but there is no guarantee of that since there are many local investors who do not follow the index.

Will the UAE and Qatar continue to stand out because of dollar-pegged currency and strong current account surplus?

The UAE and Qatar will not stand out because of those characteristics, since there are many other markets that have similar characteristics.

Which sectors do you prefer in the UAE and Qatar and why?

As bottom-up stock pickers, we do not favour any particular sector. Our investments are based on specific stock selections.

Andrew Jones, portfolio manager at New York-based emerging markets equities at PineBridge Investments

How attractive are UAE and Qatar shares given the strong rallies over the past year?

The fundamentals of UAE and Qatar companies are very positive, especially in Dubai and Abu Dhabi, where real estate prices are rising, visitor numbers are up, and banks are well capitalised and liquid. Earnings growth is good, in the low double digits. However, valuations are among the highest across emerging markets, with UAE stocks trading at an average of 21 times forward earnings and two times book, while Qatar stocks are trading at 16 times forward earnings and 2.4 times book. It is therefore very important to be selective.

Which countries offer the most attractive opportunities in the MSCI Emerging Market Index?

PineBridge manages 13 emerging markets equities funds and, of these, the two with global mandates are overweight on Mexico, the Philippines and Taiwan. The Mexican economy is picking up and the new president is undertaking reforms, which will inevitably go through a painful phase before bearing positive results. The Philippines is experiencing a period of structural growth, with the economy underpenetrated in several areas, including retail and banking. Meanwhile, the Taiwan market is home to many very profitable and innovative companies, notably several in the Apple supply chain.

Will the UAE and Qatar stock benchmarks become more correlated to the MSCI Emerging Market Index?

The correlation will increase because of passive fund flows from exchange-traded funds and index trackers, but there will be some divergence because the markets tend to be seen in the Middle East and North Africa grouping and also move to a slightly different economic rhythm because of trade and other linkages. I expect price movements to be more exacerbated because there will be a lot of liquidity coming in and out of smaller doors, and I think we have already seen that.

Will the UAE and Qatar continue to stand out because of the dollar-pegged currency and strong current account surplus?

The GCC markets stand out, especially because of the strong current account and fiscal surpluses, which provide macroeconomic stability. Three years ago several countries in the emerging markets space were running current account surpluses, but that is no longer the case. Even China has had its surplus reduced.

Which sectors do you prefer in the UAE and Qatar and why?

Several sectors are attractive in terms of fundamentals, but on a valuation basis I would say telecommunications is relatively attractive. Some of the regional leaders are not fully understood by the investment community, and that will change with time.

Sachin Mohindra, portfolio manager at Invest AD in Abu Dhabi

How attractive are UAE and Qatar shares given the strong rallies over the past year?

Although valuations of broad market indexes have gone up subsequent to the rallies seen in both the markets, we can still find companies with attractive valuations, especially if one adjusts for underlying growth. We still feel that investors focused on fundamental research-driven stock selection can still find attractive medium to long-term investment opportunities in the listed equities market across the capitalisation curve. We like a number of companies for their sustainable underlying earnings growth and improving corporate governance standards. We also feel that a premium valuation relative to other EMs can be justified in the long term given twin surpluses and a well-established currency peg.

Which countries offer the most attractive opportunities in the MSCI Emerging Market Index?

No Comment. The only countries we track are the UAE, Qatar and Egypt.

Will the UAE and Qatar stock benchmarks become more correlated to the MSCI Emerging Market Index?

We expect the correlation to increase, albeit slightly, over the long term.

Will the UAE and Qatar continue to stand out because of dollar-pegged currency and strong current account surplus?

Yes. This in our opinion will continue to remain a significant differentiating factor relative to other emerging markets. Strong surpluses in particular will continue to drive growth through higher government spending.

Which sectors do you prefer in the UAE and Qatar and why?

We are bottom-up stock pickers and hence like a number of stocks across sectors. However, in very general terms we continue to like the trade, tourism, retail and logistics sector in the UAE. We also like a few names in the banking sector. In Qatar we prefer companies linked to the hydrocarbons sector for a medium- to long term investment.

Edward Evans, client portfolio manager for emerging markets equity at Schroders in London

How attractive are UAE and Qatar shares given the strong rallies over the past year?

When they move up to the MSCI Emerging Market Index they are actually going to be very small. The UAE will be about 0.6 per cent of the index and Qatar will be slightly less – 0.5 per cent – but in the grand context of the emerging market index they have moved up quite a bit and if you look at valuations in terms of price-to-earnings ratios some of the stocks in these indexes look stretched. That said, the driver of the performance behind them is mostly fundamental. Although valuations have moved up and are not as attractive as they used to be, we’re still finding on a bottom-up selection basis that there are good ideas to invest in.

Which countries offer the most attractive opportunities in the MSCI Emerging Market Index?

In our investment models, the UAE and Qatar are now in the middle range in terms of attractiveness. Today we have about a 1 per cent position in each market out of our US$19 billion in our core global emerging market strategy funds. China and South Korea are towards the top and among our biggest overweight positions in our portfolio. China faces several significant challenges but the key point here is that all these problems are well known and to a certain extent these concerns are priced in. The broader emerging market is looking cheap and China is trading at a discount to that.

Will the UAE and Qatar stock benchmarks become more correlated to the MSCI Emerging Market Index?

As the UAE and Qatar join the emerging market index, you’d expect them to attract more foreign investors. In the past it was more domestic funds but going forward international investors will play an increasingly large role within these markets. You’ll have passive money as they enter the market. The correlation might be limited because in total they will only represent 1.1 per cent of the index. As more passive money enters, however, you would expect over time greater correlation. As these markets develop they will become more correlated. We are at the early stages of that.

Will the UAE and Qatar continue to stand out because of dollar-pegged currency and strong current account surplus?

Both the UAE and Qatar have moved very quickly over the past year and year-to-date. In my opinion, there’s two primary reasons for this. On the one hand there’s the increased international investor interest in these markets ahead of the reclassification. But also, and that shouldn’t be dwarfed by that, there is the strong fundamental recovery in growth of both these economies. In the UAE the property market is recovering very quickly from the debt crisis a few years back and likewise in Qatar, which is predominantly infrastructure-led.

Which sectors do you prefer in the UAE and Qatar and why?

In the UAE, our interest tends to focus on real estate companies. In Qatar, financials and other off-benchmark companies. Off-benchmark companies have missed the hype ahead of reclassification.

mkassem@thenational.ae

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Updated: May 31, 2014 04:00 AM

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