The thread of Fed tapering, the challenge of youth unemployment and the promise of African investment were among the issues discussed at FundForum Middle East. George Mitton reports.
After two years in Doha, the Mena Investment Management Forum moved to Dubai this November, and in the process regained its former name, FundForum Middle East.
Spread over three days, the conference allowed delegates from the Mena region and elsewhere to discuss the important issues facing the funds industry.
Tim Fox, chief economist at Emirates NBD, did not shy away from the big issues. As part of a wide-ranging economic discussion, he made clear his view that continued quantitative easing by the US Federal Reserve is bad for the world economy.
Why? Because the Fed money-printing programme, while it may be good for investment bankers, is not prompting the private sector to spend any more. The longer QE remains, says Fox, the harder it will be to get rid of, so the Fed should begin tapering its bond purchases soon.
He added that winding up the Fed’s bond purchases would not amount to monetary tightening. “It’s been said that the Fed’s job is to take away the punch bowl when the party gets going. But tapering does not amount to taking away the punch bowl, just adding the punch more slowly.”
Fox’s views were consistent with those of Mark Mobius, executive chairman of Templeton Emerging Markets Group. He says the market reaction to Ben Bernanke’s hint that tapering would begin this year, and the subsequent hammering of emerging markets, was irrational.
“I tell people, ‘Please don’t pay attention to tapering. It’s insignificant, it’s a psychological issue’.”
Later, at a private discussion for journalists, Mobius admitted that “psychological issues” can still move markets, and conceded that when tapering finally did begin, his emerging market holdings could expect a short-term hit. However, he maintained that large central bank holdings by China and other countries will allow them to take counter-cyclical actions.
Mobius also took a strongly optimistic view of the Arab spring, claiming that the revolutions of 2011 will result in economic reforms to put the Mena countries in a stronger position for future growth. He conceded that there have been short-term obstacles to contend with, for instance when companies in the Orascom Group moved their listings from Cairo to Europe in the wake of the revolution. But in the long-term he remains optimistic.
There was pessimism elsewhere at the conference, however. Pippa Malmgren, a former financial market adviser to the White House, took a bearish view of the eurozone, challenging the apparent view of the markets that the region has completed a successful recovery. “This lull in the market where everyone says it’s fine, doesn’t ring true.”
Malmgren takes a sceptical view of the Outright Monetary Transactions (OMT) programme, which is credited with having reassured the markets that the European Central Bank (ECB) will do whatever it takes to save the currency union.
In fact, what the ECB said was that it would do whatever it takes within its mandate, says Malmgren. Germany could rule that the actual use of the OMT is unconstitutional and therefore not within the mandate, she warns.
“The OMT works as long as you, the market, don’t test it,” she says.
Demographics
Other speakers took a more focused look at the Mena region. Walid Hayeck, head of asset management, The National Investor, examined the demographics in the region, and found one significant challenge.
“The scary figure is youth unemployment, which at 24% is the highest in the world,” says Hayeck. “You could say we have a Mediterranean problem,” he added, referring to the high youth unemployment seen in countries such as Greece, Spain and Portugal since the financial crisis.
Hayeck blames an educational mismatch for failing to provide the right skills needed in the Mena economies. The literacy rate across the Mena region is high at 89%, just one percentage point shy of the global average, according to Hayeck’s figures. Yet the region both loses labour to the western world – a “brain drain” – and imports it, evidence that educational institutions are not providing people with the skills they need to succeed in their own economies.
Hayeck suggests one problem is that regional governments have prioritised infrastructure and real estate at the expense of other sectors. Manufacturing accounts for only 4% of regional GDP, he says, which is tiny proportion compared to other regions.
“In my view, there’s no other way but to promote entrepreneurship,”he says.
Another interesting perspective on the region was provided by Joel Kukemelk, fund manager at LHV Asset Management, who runs a GCC fund from the surprising location of Estonia. His fund has been successful in recent years, which suggests managing it from a small country in eastern Europe has not put him at too › big a disadvantage compared to fund managers based in Dubai or Riyadh. He was able to offer an outsider’s perspective by commenting on the attitudes he meets when marketing his fund in Scandinavia and elsewhere.
“Almost every time I meet investors in northern Europe, I have to explain what GCC means,” he says, a sobering thought given that the abbreviation for Gulf Cooperation Council is so commonplace in the region that people take it for granted.
“You have to do a lot of education just to get the foreign investor appetite,” he adds.
THE BIG CONTINENT
Many delegates were keen to discuss the growth opportunities in Africa. Giulia Pellegrini, sub-Saharan African economist, JP Morgan, gave a useful overview. Growth will be softer this year, she says, though certain countries, such as Angola, can expect an inflow of foreign currency thanks to expected rises in oil production.
Other countries may have to wait a little longer for expansions in oil output. Nigeria’s oil industry bill is still stuck in parliament, she says, and this is holding back investment in the country’s oil and gas sectors.
Major infrastructure shortages continue to limit growth on the continent. Africa generates just a third of the energy generated by the Bric [Brazil, Russia, India, China] countries, she says. Another potential challenge is that wobbles in commodity prices will strike many African nations particularly hard.
In conclusion, investors must do their research, she says. There are huge variations between African nations. For instance, Rwanda has in recent years become the “poster child” of the World Bank’s Doing Business report, climbing steadily to a level that matches some western countries. In contrast, a number of African countries such as The Ivory Coast still wallow at the bottom end of the ranking.
One delegate raised an interesting question. How much faith can investors put in economic data released by African countries, given that large parts of the economy are not well measured, and data gathering capacities of many African governments are limited?
“It’s true there’s a large informal economy that’s hard to capture in official statistics,” says Pellegrini. “One can only look over the data with a critical eye.”
A number of fund managers spoke in favour of investing in Africa. Zin Bekkali, chief executive of Silk Invest, a specialist frontier market investor, says that today 750 million Africans live above the poverty line, meaning they are potential consumers of a wide range of goods from packaged foods to babies’ nappies. Every year, this population rises by a number equivalent to the population of France – a compelling customer base.
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