Emerging markets haven't exactly been thrilling investors lately, but some analysts say a shift toward Middle East countries could rejuvenate the sector.
Saudi Arabia and Iran—a country more often associated with missiles than opening bells—are among the nations being closely watched by analysts and portfolio managers who are looking to hop onto this trend in its early stages.
“In the Middle East right now, there is a pretty active discussion about Iran,” Leo Grohowski, chief investment officer at BNY Mellon Wealth Management, told Private Wealth. “If a nuclear agreement is reached, which will allow Iran to trade oil and better re-engage with the international community … it could become a heavy weight.”
The nuclear pact is actually one of two upcoming changes that analysts say could significantly shift the investing landscape in the Middle East and create opportunities for investors.
The other milestone is the planned June 15th opening of the Saudi Arabia stock market to non-residents, which is expected to stimulate growth for both Saudi Arabia and its neighbors.
In London, for example, Oliver Bell's Africa, Middle East and Frontier Team is poised to pounce on the Saudi Arabia market for T. Rowe Price investors, who since 2006 have only been able to get investment exposure to the nation through swaps.
Bell sees Iran as having a more diversified economy than Saudi Arabia. Iran is also less oil dependant, he added. His team sees the importance of oil to Iran as essentially equivalent to Canada's. Unlike many EM Frontier countries, he noted, Iran is “not plagued by massive public debt.”
Government expenses are about 15 percent of GDP in Iran, which could enact pro-business reforms under the direction of the elected president, Hassan Rouhani, he said, adding that the reforms could attract foreign businesses to the nation.
This, however, is all conjecture, as analyst say Iran and Saudi Arabia still have a way to go before they are truly investable. But investors looking for risk opportunities will consider the two countries, Grohowski said.
For those who want to get ahead of the trend and gain exposure to the countries now, it is possible to invest in the shorter term through Middle East companies in the indexes—such as those in Turkey and the United Arab Emirates—that will will benefit from an improved Iran economy, he said.
“It's early days here. Due diligence is going to be critical,” Grohowski said “But a lot of opportunity is thematic and multi-year. Often pools of capital in wealth management tend to be longer-term investors. We're not looking for a trade but to invest.”
Bell also sees Iran as a “very attractive market” due to a large, liquid market that is supported by an educated population and a workforce that is half comprised of women, he said. He likes the reformist government and compares Iran's demographics to those of Turkey. Iran has a population of around 80 million and a GDP of $419 billion, he noted, and a market-cap size of $170 billion. “Iran has the largest gas reserves and third largest oil gas reserves globally,” he said.
Bell's team also is impressed by the Saudi stock market's $445 billion market cap and liquidity; it trades up to $4 billion a day. And, thanks to the team's swap activities, it covers and rates more than 80 percent of the market cap of Saudi Arabian companies.
“Saudi Arabia is making all the headlines” after announcing last week the date of the market's opening and publishing its final rules, Bell said. Saudi Arabia has also pleased investors after convincing OPEC to maintain oil production in November, for the smooth accession of King Salman after King Abdullah's death in January and for intervening in the conflict in Yemen last month, he added.
Its 168 listed companies cover 15 industries, in sectors ranging from petrochemicals, banks and telecom to hospital groups, education companies and travel companies.
That path could be long, Bell says, but the debate over whether it will enter the MSCI Frontier Index first or go straight to the MSCI Emerging Markets Index “will now start.”
Like Iran, Saudi Arabia also has a young population, with 50 percent under 20 years old, Bell said. “Our regular investment trips confirm the speed at which the landscape is transforming, with new universities, new financial districts, new ports, new airports and of course the world’s largest tower, all being built.” Bell said.
