Demographics, agribusiness show the way to Middle East, Africa riches

Funds investing in the Middle East and Africa can offer potential diversification, while giving access to the region’s low debt and high growth economies, driven by demographic profiles that show 60% of the one billion-strong population under the age of 24.

The $36.7m T. Rowe Price Middle East and Africa Equity Fund is a Luxembourg-domiciled SICAV that invests in a range of holdings across the Middle East and North Africa. The fund manager is Oliver Bell (pictured), who joined T. Rowe Price in 2011 from Pictet AM, where he was head of Global Emerging Market Research.

Nigeria favoured

Bell likes Nigerian financial stocks, which are trading close to book value following a series of crises. “The size of the last [government] bailout surprised a lot of people,” he says. “I believe it shows a real determination to make it the final intervention. We expect this to be the end of serious debt problems.”

In South Africa, the fund’s single largest country holding, the focus is on corporate equity. But, overall, exposure is still underweight against the S&P index, due to concerns over growth and links to troubled European economies.

In the Middle East, the Arab Spring has put political risk at the forefront of investors’ minds. The fund is slightly underweight in Egypt, reflecting concern about further unrest, and the government’s unwillingness to devalue. But upheaval has prompted government expenditure in Saudi Arabia, increasing spending in the consumer sector that the fund is invested in.

Since listed Saudi stocks are closed to foreign investors, investment is through a form of swap-note via local third-parties, carrying some counterparty risk. However, there are hopes the government will lift restrictions as it seeks to attract the stabilising influence of large institutional investors.

Holdings in South Africa, Saudi Arabia and Nigeria make up about 70% of the fund, but smaller stakes are held in markets such as Ghana and Zambia. Trading volumes are low, but Bell is sanguine about liquidity risk. “Because we have a large part of the fund invested in liquid markets, such as Nigeria, South Africa and Saudi Arabia, we feel comfortable with the low liquidity presented by our investments in other regions.”

By sector, against the S&P Emerging Frontier ME & Africa BMI ex-Israel, the fund is overweight in consumer staples, energy, healthcare, industrials and business services and cash. It is underweight in consumer discretionary, financials, IT, materials, telecoms and utilities.

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