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AD Investment Management (ADIM) said it sees opportunity for MENA investors to selectively find value in equities, despite the spike in valuations after the initial shock of COVID-19.
The Middle East-focused asset management boutique sponsored by Invest AD, said with fiscal stimulus and deficit spending to remain integral -- coupled with yield curve control and vaccine rollouts accelerating the evolution of a ‘new normal’-- the investment landscape in 2021 may reflect a continuation of the reflation/momentum trade, albeit at increased volatility.
There is also potential to position portfolios for recoveries in stocks depressed by years of unfortunate cycle timing, ADIM said in its Annual Outlook Letter for 2021.
Investors need to pick stocks with relatively attractive valuations that can help to normalize in returns within a period of time order to mitigate the risk of increasing interest rates disrupting the surge in equities, it said.
“Markets in aggregate seem to be currently priced to beyond perfection, where a lot needs to go right on the path to projected growth for them to justify their valuations,” said ADIM’s Annual Outlook Letter. “Even then, they are not offering the kind of returns one would hope for over the next decade from where we are today.”
ADIM sees various themes within MENA states that can provide resilience and performance in portfolios this year, and beyond.
For example, in healthcare, mandatory private sector cover in Saudi Arabia is an example of why investors should be bullish, with downside risks from an expat exodus from the GCC now counterbalanced by relaxed residency measures.
Strong fundamental drivers underpin the potential in education. In Kuwait, for example, 2020 was a litmus test of the government’s commitment to upholding scholarship schemes which should, in turn, continue to support private sector higher education providers.
Several emerging e-commerce platforms in MENA will likely mature into a concentrated ecosystem of marketplaces and order fulfilment service providers, in line with online retail retaining some of the share it has gained from traditional outlets.
Regional tourism has a bright outlook over the next two years, with the 2022 World Cup in Qatar, plus routes re-opening between the GCC and Qatar, as likely demand drivers.
The report also notes the region’s steepening awareness regarding climate challenge and highlights the opportunities and concrete steps being taken by leading regional National Oil Companies to reduce the carbon footprint.
Moreover, the region’s mineral wealth coupled with the adoption of investor-friendly mining laws may contribute to improving FDI. This is based on the expected secular demand for industrial metals that is supported by the theme of “electrification of everything” and the decarbonization of the electric grid.
Last year, some companies did well because of the lockdown (food retail, logistics), while others did well in spite of them (select industrials, financials). “It is this bucket that is of most interest to us as investors. These potentially resilient businesses are what we would like to maintain and increase exposure to, as they prove less susceptible to exogenous shocks and/or happen to be at the epicenter of longer secular change.”
“In sum, we see fewer volatility-inducing events occurring in 2021, yet we remain cognizant that due to the residual impact of stimulus measures taken last year and with more expected this year, volatility is still very much with us in 2021.”
(Writing by Brinda Darasha; editing by Seban Scaria)
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© ZAWYA 2021
