Middle East and North Africa equities are set to outperform emerging markets as higher dividends and state-funded expansion lure investors hunting for better returns, Franklin Templeton Investment Management Ltd. (BEN) said. The Bloomberg GCC 200 Index (BGCC200) of the biggest Gulf Cooperation Council stocks rose 3.7 percent in 2012, lagging behind the 15 percent rally in the MSCI Emerging Markets Index. (MXEF) Shares in the Bloomberg GCC 200 Index, which includes the most-traded stocks in the six-nation group, offer a dividend yield of 3.87 percent, versus 2.67 percent on the MSCI Emerging Markets Index, according to data compiled by Bloomberg. “As international investors search further afield for yield, the MENA equity case will garner more interest," Bassel Khatoun and Salah Chamma, Dubai-based co-heads of MENA equity at Franklin Templeton Investments (ME) Ltd., said in a Dec. 30 e- mailed response to questions. Stocks trailed emerging-market peers in the past five years and “given the supportive regional fundamentals, there is a strong case for the reversal of that trend," they said. MENA stocks underperformed peers as a wave of popular unrest in the so-called Arab Spring and Dubai's debt crisis deterred foreign investors. Momentum is returning as the GCC invests oil wealth on more than $1 trillion of projects, including schools and roads in Saudi Arabia and stadiums to host the 2022 soccer World Cup in Qatar. Companies benefiting from this spending will lure investors given attractive valuations, said Franklin Templeton, whose MENA fund had $50 million in assets under management at the end of November. Catching Up Gulf equities trade at 1.57 times book value, or assets minus liabilities, while those on Egypt's index trade at 1.39 times, versus a multiple of 1.79 for developed markets in the MSCI World Index. The BGCC 200 Index gained 1 percent at 5:10 p.m. in Dubai, with the emirate's benchmark measure surging 2.7 percent, after U.S. lawmakers passed a bill to avert spending cuts and tax gains threatening the economy. MENA economies will grow 3.6 percent in 2013, according to International Monetary Fund forecasts. That's three times faster than average growth for developed nations, data compiled by Bloomberg show. Between 2009 and 2012, the MSCI emerging-market gauge surged more than 85 percent, compared with a gain of 17 percent for GCC equities and 19 percent for Egypt's EGX 30 Index. Volume on MENA markets languished in the past two years as popular revolts ousted leaders in Tunisia, Egypt, Libya and Yemen, sparked a civil war in Syria and clashes in Bahrain. Oil Wealth Apart from Bahrain, GCC states have emerged mostly unscathed, helping draw more investors to equities in the bloc, which supplies about a fifth of the world's oil. Trading volume in Dubai averaged 119 million in the fourth quarter compared with 62 million a year ago. Brent crude held above $100 a barrel for a second year. Crude oil rallied as much as 1.7 percent to $93.42 a barrel in New York today. “As a result of high oil prices and increased production, MENA countries have amassed considerable capital surpluses over the past 10 years," said Khatoun and Chamma. “The region offers exposure to economies with organically high growth rates that are supported by a combination of low debt and ample reserves." The economy of Saudi Arabia, home to the biggest Arab bourse, grew 6.8 percent in 2012, according to Finance Ministry estimates. That beat the 5.6 percent median estimate of 16 analysts compiled by Bloomberg. The fiscal momentum is encouraging Saudi companies to expand, triggering the fastest loan growth in almost four years and record debt sales in 2012. The benchmark Tadawul All Share Index gained 6 percent in 2012 after dropping 3.1 percent in 2011. Ownership Restrictions “Pro-growth fiscal measures and accelerating bank lending has created some highly compelling investment opportunities," said Khatoun and Chamma, who sub-advise the Franklin MENA Fund, which returned 8 percent last year, according to data compiled by Bloomberg. The fund is “keen to access companies that are directly or indirectly exposed to governments' infrastructure spending," they added. Still, foreign investors can't invest directly in Saudi stocks including Saudi Basic Industries Corp. (SABIC), the world's biggest petrochemicals company by market value, and Kingdom Holding Co. (KINGDOM), which is owned by billionaire Prince Alwaleed Bin Talal. Moves to open up more to foreigners could serve as a “transformative catalyst," Khatoun and Chamma said. ‘Attractive' Valuations Index provider MSCI Inc. classifies the Persian Gulf's seven bourses as frontier markets, a designation that typically applies to markets that are less developed and have more restrictions on foreign stock ownership. An upgrade for the U.A.E., Qatar and Saudi Arabia would potentially expand the dedicated investor base to about $450 billion from $15 billion now, Khatoun and Chamma estimate. Shares in Qatar, the world's richest country on a per- capita income basis, fell 4.8 percent in 2012, the first annual decline since 2008 and the second-worst showing in the Persian Gulf after Bahrain. The drop happened even as Qatar's economy expanded 6 percent, according to the median estimate of nine analysts compiled by Bloomberg. The country plans to spend $130 billion as it prepares to host the World Cup. Equities on the benchmark QE Index (DSM) are valued at 1.59 times book value, compared with 2.15 times for the S&P 500 Index. (SPX) “Current valuations are attractive from both a relative and historical perspective and are complemented with a degree of downside protection," Khatoun and Chamma said. The MENA IPO pipeline could also be improving after Saudi companies helped the region more than double sales this year to $2 billion, Ernst & Young International said Dec. 23. Profit Pickup Profitability at the region's companies could also support equities. Dubai-based Emaar Properties PJSC (EMAAR) rallied 46 percent in 2012, recovering from two years of declines, as the developer of the world's tallest skyscraper benefited from a revival in trade and tourism. Emaar's annual profit probably grew 16 percent, the average estimate of 11 analysts on Bloomberg shows. That compares with a 27 percent drop in 2011. The U.A.E. central bank's Dec. 30 decision to curtail mortgage lending may ease concern that Dubai is poised to repeat one of the world's worst property market crashes and will help drive out speculators, according to Emaar. Egypt's EGX 30 was the second-best performer among 93 global gauges tracked by Bloomberg in 2012, after its 51 percent jump erased the prior year's plunge. The index is set to rally in the first quarter, led by “fast money" accounts, VTB Capital Plc said in a report last week. “With a strong macroeconomic backdrop, attractive valuations and some important liquidity catalysts on the horizon, 2013 bodes well for the MENA region," Khatoun and Chamma said. Bloomberg
