'Exceptional returns' of Mena equity markets support case for more investment, Franklin Templeton says

Healthier economic fundamentals also bode well for the regional bond market, the global investment manager says

Equity markets in the Mena region have delivered “exceptional” returns despite Covid-19 headwinds and are set to cement their gains, supported by an economic recovery that is well under way, according to global investment manager Franklin Templeton.

Although last year was challenging, the global investment manager expects a strong recovery in corporate earnings in Mena markets this year.

Earnings are expected to grow by 71 per cent, compared with a 31 per cent contraction a year ago, said Bassel Khatoun, managing director of the Franklin Templeton Emerging Markets Equity group, during an online seminar on Monday.

This will support current valuation levels and the wide dispersion across the region creates opportunities for active management.

Critical structural and fiscal reforms undertaken by regional governments, especially GCC countries over the past few years, also support the investment case for Mena equities.

The reforms have bolstered fiscal strength and have helped economies to bounce back quickly from the crisis.

“The global environment has been supportive of healthy equity markets – both frontier and emerging markets this year – and within that Mena markets, have actually demonstrated some of the most exceptional returns,” said Mr Khatoun.

“The regional index [is] up by over 20 per cent barely halfway into the year.”

Many of the Gulf’s equity markets have outperformed their global peers this year.

As of Monday’s close, the Abu Dhabi Securities Exchange was 34 per cent higher since the year began while Saudi Arabia's Tadawul, the Dubai Financial Market and the Boursa Kuwait's Premier Market were up 26 per cent, 15 per cent and 14 per cent, respectively.

In comparison, the MSCI World Index was about 11 per cent higher.

Economies in the Mena region are experiencing a strong rebound after the twin shocks of an oil price slump and the Covid-19 slowdown that tipped the world economy into its worst recession since the 1930s.

The International Monetary Fund expects Mena economies to grow by 4 per cent on average this year after shrinking by 3.4 per cent last year.

Regional policymakers reacted to the pandemic far quicker than some of their peers in emerging markets, with effective movement restrictions and rapid vaccination campaigns supporting demand and economic recoveries.

Crude prices have also rallied, rising by more than 40 per cent since the start of this year. Oil hit a 32-month high on Monday as countries worldwide hasten their vaccination programmes and reopen economies.

Brent, the international benchmark that accounts for more than half of the world’s crude, rose by 0.89 per cent to $73.34 a barrel at 5.04pm UAE time.

West Texas Intermediate, the key gauge for US oil, was up 1.03 per cent at $71.64 a barrel.

“With oil prices trending above $70 per barrel, we see a very meaningful upside to the IMF’s GDP forecasts,” said Mr Khatoun.

The fiscal cost of the rebound has been much more modest, with the region spending about a third of what other emerging markets, which have yet to record similar rebounds, have expended.

“This has left sovereign balances sheets in a healthier position and with much more fiscal flexibility and manoeuvrability going forward in order to support their long-term growth objectives,” he said.

“The Mena region is also blessed with a young population with high potential for productivity and that creates a very long demand runway for consumption growth.”

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The global environment has been supportive of healthy equity markets, both frontier and emerging markets this year and within that Mena markets have actually demonstrated some of the most exceptional returns

Franklin Templeton is bullish about UAE equities as the recovery of the residential property market, especially villa prices, and the tourism sector support equity prices in the Arab world’s second-largest economy.

“A resilient economy, continuing reforms and an extensive Covid-19 vaccination programme leads us to maintain a favourable outlook on the UAE,” he said.

The investment manager is also optimistic about equities in Egypt, whose economy has continued to grow in an environment where other countries have experienced sharp contractions.

“Although low liquidity has been a challenge for the market, strong fundamentals and increasingly attractive valuations contribute to support our positive view,” said Mr Khatoun.

Healthier economic fundamentals also bode well for the region’s bond market and will “markedly improve our outlook for second half of the year”, according to Mohieddine Kronfol, chief investment officer in Franklin Templeton's global sukuk and Mena fixed-income department.

Despite having a market capitalisation of more than $600 billion, international investors continue to be light on GCC bonds and are missing out on “strong risk-adjusted returns and valuations that remain generous relative to credit ratings”, he said.

“GCC policymakers have reinforced their commitment to fiscal consolidation and a multi-year structural reform journey, which underpins our constructive outlook for regional debt,” he told the online seminar.

“Higher oil prices, the ongoing recovery, structural reform trends and a reduction in geopolitical risks support our credit allocations.”

The market share of GCC bonds has more than doubled relative to loans over the past five years and they now command a leading position in emerging market debt indexes.

GCC issuers are on track to issue $125bn worth of bonds this year, in line with the total for last year.

However, sovereign issuance is at 30 per cent of the total volume, compared with 50 per cent last year and in 2019.

This indicates the changing make-up of the market as corporate issuers are increasing, he said.