Despite ongoing political and military tensions in the region, there are still pockets of opportunities.
Recent sentiment about the Middle East’s economic landscape has been relatively subdued, as the region suffers from a double-whammy of lacklustre growth due to depressed crude oil prices and rising regional tensions.
In the midst of this backdrop, Mishal Kanoo, chairman, Kanoo Group, believes that the Middle East still has plenty of asset classes to offer investors searching for high yields.
In his state of the industry address at FundForum Middle East and Africa, held in Dubai, Kanoo says that from an outside perspective, the region may appear to be entering a period of stagnation.
“Towards the end of last summer, you would’ve thought that this region is dead – there was no fiscal spend and there were political issues to contend with,” he says. “We were in a ‘blah’ position, where you’re not sure if it’s going to lead to growth or recession.”
Kanoo was referring to the simmering diplomatic tensions between Qatar and its regional neighbours: Saudi Arabia, United Arab Emirates, Bahrain and Egypt. Immediately after the four countries severed ties with the natural gas giant, the Qatar Stock Exchange index plummeted seven per cent.
By changing public perception about the Middle East, fund managers would find that there are pockets of opportunities in the region.
In addition, a military conflict in Yemen has dampened any economic prospects for the country. Reuters reported recently that the cost from damage to infrastructure and economic losses from Yemen’s war has now reached more than US$14 billion.
The decision by the members of the Organisation of Petroleum Exporting Countries (OPEC) to cut a further 1.8 million barrels per day of crude from the global market by holding back oil production until March 2018, prompted EmiratesNBD to lower its growth forecast for the GCC region.
However, Kanoo believes that by changing public perception about the Middle East, fund managers would find that there are pockets of opportunities in the region, despite the challenges it is facing.
Investing in the Middle East growth story
During the oil boom, regional governments have invested heavily in modernising infrastructure and developing sectors, which eventually led to job creation and economic development.
With the oil price crash came fiscal consolidation and rational spending. However, earlier investments have provided the foundation for attracting future capital inflows, says Kanoo.
Citing UAE as an example, he underscores ongoing projects related to the Expo 2020, the US$36-billion expansion of Dubai World Central, and the construction of Abu Dhabi airport’s US$3.2-billion midfield terminal complex.
“Abu Dhabi will also open the Louvre Museum, then the Guggenheim Museum and the Zayed National Museum. Imagine the related sectors and businesses that would benefit from these developments,” says Kanoo.
"Here in the Gulf, especially the UAE, investment opportunities are accessible.”
The region has also, in the past, invested in upgrading its petrochemical sector and Kanoo believes the Middle East is in a strong position to become the world’s petrochemical hub.
According to the Gulf Petrochemicals and Chemicals Association, the regional petrochemical industry has expanded by almost four per cent last year, to reach 150 million tonnes of capacity and outperforming the global growth average of 2.2 per cent. The lion’s share of investment came from Saudi Arabia, with the opening of Sadara Chemical, a US$20-billion joint venture between Saudi Aramco and Dow Chemical Company.
“With plastic demand growing, the need for feedstock, which is produced by the petrochemical sector, will also grow,” Kanoo adds.
Aeronautics is also a promising sector for investment, according to the Kanoo Group chairman. “Nobody, other than China, buys as many aeroplanes as the Middle East, and with that comes the opportunity for banks to provide financing and insurance companies to offer coverage.”
The region’s growth story – from a barren desert to a financial oasis – has also attracted talent from around the world. As the population expands, demand for housing, transportation, retail, education, healthcare, and professional services has likewise seen an uptrend, he says.
Kanoo admits that a dark cloud looms over the region because of the ongoing political tension.
“I don’t know how and when the tension is going to end, but it shouldn’t stop investors from putting and growing their money into the region,” he says. “The investing adage ‘buy low, sell high’ applies here. Now is the time to invest in real estate, when there is a dip in the market.”
In terms of equities, currently the economic climate has resulted in low profits and valuation for some of the region’s major companies, making them ideal prospects for bargain hunters.
He is optimistic, however, that conflicts will eventually end, creating opportunities for investors to step in and invest in infrastructure rehabilitation development, for example, in Yemen.
“There are opportunities in various parts of the world, there are some where you may have access to and others that you won’t. Here in the Gulf, especially the UAE, investment opportunities are accessible,” he says.