Bassel Khatoun’s investment outlook on Middle East stocks

Baseel Khatoun, Mena equities specialist at Franklin Templeton Middle East, foresees volatility and opportunity in the weeks ahead.

Bassel Khatoun, the co-head of Mena equity local asset management at Franklin Templeton Investments Middle East, expects a volatile month ahead. Satish Kumar / The National
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Bassel Khatoun is co-head of Mena equity local asset management at Franklin Templeton Investments Middle East. Lebanese-born but raised in Britain, he joined the company in 2007 when it was Algebra Capital. He previously worked in the investment banking division of Citigroup in London.

What is the asset class and geography are you focused on?

I am focused on Mena equities which, after a year of strong returns, are an area of renewed interest among international investors. Despite the importance of the Mena region in the world economy continuing to rise, Mena equities remain a hugely under-represented asset class in global portfolios. We expect this material disconnect to change over time. In our opinion, the long-term growth potential of the region and the gradual development of its capital markets present investors with an attractive opportunity today.

What is the outlook for the month ahead?

We expect it to be a volatile month that is marked by continued turbulence in some emerging markets. The decrease in the Fed bond purchase programme has led to capital flight from countries dependent on foreign capital inflows to fund trade deficits. As such, investors will focus on differentiating the risk-return parameters of emerging market countries. With this in mind, we believe that Mena markets will continue to demonstrate their relative resilience, thereby confirming their attractiveness. The strength of sovereign balance sheets, impressive non-oil growth and a dollar currency peg is likely to attract additional flows into regional equity markets in 2014. Moreover, the Mena region boasts one the highest dividend yields globally, which serves to further protect downside risk during a period of potential volatility.

Where are you finding investment opportunities?

In spite of strong intra-regional ties, countries in the region enjoy different economic dynamics. This creates a diverse investment universe where opportunities abound. Gulf countries, in particular, retain the means and the motive to stimulate growth through expansionary oil-funded spending. Qatar's commitment to hosting the 2022 World Cup, for example, will ensure massive investment in infrastructure that will be channelled through local banks. In the services-orientated economy of the UAE, we continue to find opportunities tied to the strong pickup in real estate and construction. The decision to award the organisation of the 2020 World Expo to Dubai will serve to focus ambitious spending plans that were already under way for the most part, presenting huge opportunities for equity investors. Finally, we expect that political progress in post-revolution Egypt will continue to push equity risk [premiums] lower and that will drive a broad-based economic recovery which we expect to be reflected in positive market performance.

What is your most valuable lesson from your career?

I would say that the most valuable lesson is the need for high conviction when investing. Any investment decision should be supported by a rigorous and disciplined due diligence process. There is no substitute for this, and we are fortunate to have a proprietary research team to ensure that we make informed investment decisions on behalf of our clients. Once an investment decision is made, it is equally important to regularly question and challenge the assumptions that underpin it. As operating environments are constantly changing, it’s critical to differentiate conviction from stubbornness.

What is your outlook for 2014?

We believe that there is a strong case for the outperformance of Mena equities in 2014 as the region continues to establish itself as a single, identifiable subset within the general emerging market universe. Tighter external financial conditions and diverging fundamentals will result in differentiation within emerging markets. The most compelling investment ideas will exhibit low external risk, improving domestic growth and a degree of currency stability. It is in that context that we highlight the Mena region as a standout investment destination in 2014. Liquidity-related catalysts, including the upgrading of UAE and Qatar into MSCI's emerging markets index, will also ensure that international investors, more broadly, begin to recognise the Mena opportunity.

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