“There is a lot of negativity for growth and we can see the valuation is very low,” the firm’s CIO of MENA Equity Bassel Khatoun told Fund Selector Asia.
The valuation of the region’s equity markets is at 10.5 times price to earnings and 1.2 times price to book, which is about 30% discount to where they traded historically, he said.
He believes the low valuations are related to the general perception of the close correlation between oil prices and the economic growth in the region, but the correlation between the MENA equity markets and oil and gas is about 12%, while the equity markets have very little representations of energy.
He highlights one of the attractions for the MENA equity markets is that they pay with very high dividends. “We pay about 4.5% dividend yields, which compares favorably to some developed markets.”
Overweight consumer discretionary, consumer staples
The consumer sector is expected to outperform the broader market this year, he said.
“We are overweight consumer discretionary and consumer staples in the fund. I think with pretty good reasons. We look at the December budget statements and try to interpret and forecast on how these policies are going to impact the economy. I think there were a lot them that can be extracted from these government budgets. Our interpretation is that what is going to be cut should be nonstrategic capex.”
The consumer sectors are likely to be less impacted, and the sector will be defensive and “hugely mispriced by the market”, he added.
Over the last 12 months, the firm has taken a much more defensive stance than previously. “One of the things that we are valuing at this stage and gravitating towards our investments are things that really are visible and have a highly cash-flow generative. We continue to be able to outperform in an environment where visibility is more clouded both globally and regionally. From a top-down perspective, we have moves more funds into the UAE as a balanced diversified economy that has a lot of nonoil sectors that are driven by trade, tourism and financial services. “