Focus: Frank Kane talks to Nadi Bargouti, the head of asset management at Shuaa Capital who ran the Mena region's best-performing fund last year.
UAE, Qatar likely to emerge bullish
Nadi Bargouti, the head of asset management at Shuaa Capital for almost two years after a stint with Samba Capital in Saudi Arabia, ran the Mena region's best-performing fund last year.
The UAE and Qatar have just had their upgrade to emerging markets status delayed by MSCI. Why the delay, in your view? Do you think they will make the upgrade in six months' time?
The delay, in our view, was due to the need to allow sufficient time for investors to assess Qatar's and the UAE's recent market enhancements and to the foreign ownership limit (FOL) issue in Qatar to be resolved.
MSCI highlighted in clear terms that industrial companies in Qatar had an almost uninvestable FOL. To put it into perspective, the top three companies by market capitalisation make up more than 50 per cent of the total market in Qatar, and each of them has an FOL of only 25 per cent.
Emerging-market inclusion for both states is a matter of when and not if and will be very bullish for these markets, as MSCI stock indices are tracked by investors with about US$3 trillion (Dh11.01tn) in assets. MSCI is showing clear interest in the upgrade; they could have just as easily deferred the decision to next year, as they did for Korea and Taiwan, but have only delayed it by six months.
The Arab Spring is becoming more confused as the year progresses. What now is your long-term assessment of the investment prospects for the region?
With revolutions in Tunisia and Egypt, a civil war in Libya, civil uprisings in Bahrain, Syria and Yemen, there is no doubt the Arab Spring has negatively impacted the region's current investment prospects; political instability has and will continue to cause further problems in attracting foreign flows until a sustainable long-term stability is maintained.
However, an important distinction to be made is that just because they are grouped under the same banner of "the Mena [Middle East and North Africa] region" does not mean that the countries all exhibit the same political, social and economic characteristics. The UAE and Qatar, for example, have been largely immune to any protests. With small populations and vast energy reserves, these countries have been unscathed.
Political stability in Saudi Arabia, in particular, is paramount to ensuring regional political and economic long-term prosperity. These uprisings are causing wealth to change hands in some countries and are keeping some investors at bay, but the sizeable energy wealth in this region has not disappeared.
Are there any clear winners yet from the social, political and economic upheaval?
The peoples of the oppressive regimes, mainly Tunisia and Egypt, are the clear winners. The ruling classes had funnelled much of the wealth into their own hands, with the Mubarak regime reportedly misallocating more than $180 billion in the three decades he ruled the country, thereby cutting off the capital needed for economic progress. When people have nothing left to lose, they lose it.
The UAE has benefited, at least relatively speaking, from the uprisings as we've seen hotel occupancy rates go up, Dubai International Airport is still on course to surpass London Heathrow for passenger numbers and become the world's busiest, and there has been significant inflows of funds into the banking sector, most probably coming from those seeking safe havens from the surrounding turmoil.
How do you think the Greek sovereign debt crisis will play out? What are the potential effects for the Middle East?
Greece is drowning in debt and cannot grow its way out of it. The ECB [European Central Bank], EU and IMF are working on a bailout but at the same time insisting on stringent austerity measures which will lead to tax increases, benefit cuts and privatisation of public assets.
Compared to global GDP or even EU GDP, the Greek debt isn't massive and should technically be able to be handled in a typical debt restructuring process, as many nations have gone through similar situations in the past.
The problem lies with the derivatives surrounding the Greek debt. You have institutions entering into naked [not owning the underlying debt] credit default swap [CDS] trades, betting that Greece will default, and at the same time the issuers of these CDS are collecting huge premiums but likely don't have the capital to cover a default. There is no transparency in the derivatives market and you don't know who holds what and how much exposure. This could be enough to cause another global liquidity scare due to the uncertainty factor surrounding Greek debt and related derivatives.
Asset management has become a real driving force behind Shuaa's business model. How do you see it developing long term as part of the Shuaa business portfolio?
Shuaa continues to support, build and strengthen this business line, and we are working to establish Shuaa Asset Management as the regional wealth manager of choice. Our areas of focus at the moment are on increasing assets under management, where much of the current flow is coming, primarily from Saudi Arabia. We realise that the investment landscape has changed and more challenges face asset managers now more than ever. In order to adapt to the constantly evolving market conditions, we continue to work on developing and expanding our product offerings.