Press releases

31 January 2012

One year on from Arab Spring: Prospects for the region

AIC canvasses opinion of investment company Global Emerging Markets managers 

This time last year the world watched as Egyptians camped out in Tahrir Square, demanding democratic reform. One year on from the Arab Spring, when civilian protestors ousted unpopular rulers in Tunisia, Egypt and Libya, the Association of Investment Companies (AIC) has asked Global Emerging Markets investment company managers what they think are the prospects for investing in the region.  

Although the Global Emerging Markets sector has slightly underperformed the average investment company over one year (to end December 2011), it has outperformed over three, five and ten years with the average company in the sector up 417% over ten years (see table).

Has the ‘Arab spring’ changed investment prospects for the region?

Mark Mobius, Manager of Templeton Emerging markets and Executive Chairman of Templeton Emerging Markets Group commented: “Yes, there have been fundamental changes. We believe that the political unrest, uncertainty and the subsequent government spending drives have created compelling investment opportunities in the region. In the short-term, of course it won’t be an easy road and we can expect turmoil, but over the long-term it’s a very positive development because the move towards more open societies in the region creates an excellent environment for economic freedom and capital market development.  You can never miss the boat if you buy when things are most negative, when people are the most concerned about the political viability of a country or region. We were investing before the Arab Spring and we continue to invest.”

Slim Feriani, Manager of Advance Frontier Markets and Advance Developing Markets and Managing Director, Advance Emerging Capital commented: “We believe that the Arab Spring has changed investment prospects for the Middle East & North Africa (MENA) region dramatically and for the better in the long-term. However, in the short-term we believe we should adopt a wait and see attitude on North Africa. Indeed, we need to see how things work out at the political, social and economic level in Tunisia, Libya and Egypt this year before deciding whether it’s the right time to invest there. Yet, we believe the outlook for some of the Gulf countries such as Qatar is extremely attractive in the short and long-term.”

Sam Vecht, Manager of BlackRock Frontiers is more balanced: “Post the Arab Spring we have seen divergent responses from different countries within the Middle East.  For those countries such as Saudi Arabia and Qatar with strong economic fundamentals, the Arab Spring may have actually improved the market outlook as their governments accelerated spending on necessary physical and human infrastructure. We are positive on the long-term outlook for companies operating in the fields of education, healthcare, retailing and water infrastructure.

“However, in other countries, such as Egypt, the Arab Spring has led to economic fundamentals deteriorating.  Egypt has seen its foreign currency reserves fall from above $35bn at the end of 2010 to $18bn at the end of 2011, raising questions as to how Egypt will meet its external financing requirements for 2012. In this context, we would highlight that while the Middle East is geographically conjoined, its politics and economic policies are divergent and therefore it is important to understand the relative investment merits of each individual country.”

Richard Titherington, Manager of the JPMorgan Global Emerging Markets Income Trust and CIO of Emerging Market Equities, J.P. Morgan Asset Management observes: “The consequences of the 2011 Arab Spring appear positive, with reallocation at the margin of oil exporter sovereign wealth back into the region, greater inclusion in political society of moderate Islamist groups and increased solidarity between the region’s monarchies. From an African perspective, growth in most African countries is on an accelerating trend, in contrast with many emerging economies elsewhere, although rising inflation is a growing concern, particularly in East Africa.

Will frontier markets benefit from a slow-down in other emerging economies?

Many Global Emerging Markets funds are heavily invested in the BRIC nations, some of which have seen a slow-down in economic growth in the past year. Could this lead to further diversification into rapidly growing frontier markets?  Although the area is not immune from global financial events, Oriel Securities have predicted that “With over-leverage still a major global issue, commodity rich frontier economies like Qatar look well placed and we see scope for Frontier markets funds to outperform in 2012.”

Mark Mobius, Executive Chairman of Templeton Emerging Markets Group commented: “In the short-term, at critical global moments, markets all over the world tend to react at the same time but such events are rather short-lived.  If you look at the longer term historical correlation of frontier markets with emerging markets and with developed markets, it’s actually very low. And also the historical correlation in between the different markets is very low. If you look at what is happening in Argentina, it appears to have no impact on what is happening in Nigeria or what is happening in Vietnam. So it’s really an asset class where we think there is diversification potential.”

Sam Vecht, Manager of BlackRock Frontiers said that: “Whilst it is unlikely that Frontier Markets will be immune to a global slowdown, we would highlight that relative to Emerging Markets, many Frontier Market economies are less connected into the global cycle and hence more able to determine their own destiny.  In 2008/9 we saw that, as a result of carrying lower debt burdens, some frontier governments were able to use counter cyclical fiscal policies to protect their countries from the worst vagaries of the financial crisis in a way that was not available to more indebted, more developed nations.  Within frontier markets, we do see countries that will benefit from a limited slow-down in other emerging economies. In this regard we would highlight those countries which are currently struggling with high inflation due to high commodity prices. In the event of an emerging market slow-down, demand would fall, lessening commodity based inflation.”

What are the prospects for frontier markets in the coming years?

Richard Titherington, Manager of the JPMorgan Global Emerging Markets Income Trust said: “Looking to the future, there remains a compelling story within frontier markets. Many trade on reasonable valuations and continue to look attractive within a broader emerging markets context based on the global liquidity cycle and the compelling longer-term growth outlook. More broadly, markets will remain sceptical over the coming months though, as inflation is more persistent in markets like India and Turkey, the cyclical outlook for real estate in China is uncertain and Europe casts a long shadow.  As these issues are gradually resolved we think investors will refocus on attractive valuations with robust earnings growth.  For the JPMorgan Global Emerging Markets Income Trust, the bottom-up, stock specific decisions taken will continue to be the driver behind delivering consistent strong returns.”

Sam Vecht, Manager of BlackRock Frontiers said that: “Frontier Markets offer exposure to fast growing companies at inexpensive valuations without the burden of high leverage or excessive 'hot' money.  If one is positive on the developing market consumer and the emergence of the middle class driving consumption, then it is impossible to ignore the 30% of the world’s population who live in frontier markets.  Adding to this the benefits of vast, untapped commodity endowments and markets which offer one of the few remaining opportunities to gain exposure to uncorrelated investment returns gives an investment opportunity which is extremely compelling.”

Mark Mobius, Executive Chairman of Templeton Emerging Markets Group commented: “Economic growth in many frontier-market countries remains high, even faster than some emerging markets, and exceeds the growth in developed markets by a wide margin. These countries are going through rapid reform and development, and while investment in these nations is clearly more risky than in their more established emerging market cousins and can be volatile, therein lies the opportunity for greater returns.”

Slim Feriani, Managing Director, Advance Emerging Capital commented: “We launched the pioneering Advance Frontier Markets Fund nearly five years ago and are very strong believers in this asset class. What is not to like? They have among the strongest economic fundamentals in the world, including by very far the lowest debt to GDP and the highest foreign exchange reserves to GDP ratios. They have been and will continue to be among the fastest growing economies because they’re starting off from a low base and are benefitting from their demographic dividend. Their equity markets are trading at or near all-time lows in terms of valuations and the ongoing structural change there is mind boggling. Yet, foreign investors are barely taking note. This perception versus reality gap offers a huge opportunity in itself. We believe frontier markets are likely to be the best performing asset class over the next five-ten years.”

Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC) said: “It’s been a difficult year for the Global Emerging Markets sector, but over the longer-term the performance figures are exceptional.  However, this is a diverse sector, with some companies focussing on frontier markets, whilst others take a broader emerging markets approach where exposure to frontier markets may be relatively low.  Investors need to do their homework and if necessary, seek financial advice.

Share price total return on £100, less 3.5% for expenses

Years		1	3	5	10
Overall Weighted Average Ex VCTs		88.39	147.68	100.80	192.40
Fund	Sector
Weighted Average	Global Emerging Markets	80.27	169.52	163.73	517
Advance Developing Markets	Global Emerging Markets	79.2	148.2	118.1	358.2
Advance Frontier Markets (AIM)	Global Emerging Markets	75.54	119.15
Ashmore Global Opportunities	Global Emerging Markets	80.61	93.49
BlackRock Frontiers*	Global Emerging Markets	66.36
JPMorgan Emerging Markets	Global Emerging Markets	81.35	164.35	141.43	472.7
JPMorgan Global Emerging Markets Income	Global Emerging Markets	86.66
Templeton Emerging Markets	Global Emerging Markets	79.28	201.81	181.17	557.54
Utilico Emerging Markets	Global Emerging Markets	90.38	175.77	138.34

 

*BlackRock Frontiers launched on 17/12/2010.  In Net Asset Value terms, a £100 investment in the company over the year to 31 December 2011 has become £77.78, less 3.5% expenses.

-Ends -

 Notes to Editors

1. Performance figures are to 31 December 2011 and are mid-market share price with net income reinvested and a 3.5% deduction for charges, stamp duty and market spread.  Source: AIC using Morningstar.
2. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment.  Today, the AIC represents a broad range of closed ended investment companies, incorporating investment trusts and other closed ended investment companies and VCTs.  The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help Members add value for shareholders over the longer term. The AIC has 345 members and the industry has total assets of approximately £90.3 billion.
3. Discrete annual % returns – share price total return on £100, less 3.5% expenses.

Performance Measure	PriceTotRe	PriceTotRe	PriceTotRe	PriceTotRe	PriceTotRe
Performance From	31/12/2010	31/12/2009	31/12/2008	31/12/2007	31/12/2006
Performance To	31/12/2011	31/12/2010	31/12/2009	31/12/2008	31/12/2007
Duration Years.Months	1	1	1	1	1
Fund
Advance Developing Markets	79.2	120.81	144.24	57.05	130.07
Advance Frontier Markets (AIM)	75.54	128.92	113.94	58.52
Ashmore Global Opportunities	80.61	119.38	90.47	68.58
BlackRock Frontiers	66.36
JPMorgan Emerging Markets	81.35	122.46	153.63	62.11	129.02
JPMorgan Global Emerging Markets Income	86.66
Templeton Emerging Markets	79.28	124.91	189.76	57.1	146.41
Utilico Emerging Markets	90.38	128.67	140.75	51.27	142.97

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