Though foreign investors have slowly started coming back to the region, there still exists a 40-50 percent discount between the Middle East markets and that of the emerging economies, mainly the BRIC nations, said Zin Bekkali.
“BRIC is still beautiful, the fundamentals are similar to the region but it has got expensive now. So that valuation gap has to bridge and the discounts will disappear,” said Bekkali, who heads the asset manager focused on the Middle East, Central Asia and Africa.
The MSCI Emerging stocks Index, gained more than 78 percent in 2009, significantly outperforming the MSCI Arabian Markets Index, which rose only around 22 percent.
Bekkali said traditionally Arab markets have shown a strong correlation with those of BRIC economies with both regions following a similar performance pattern till 2008.
But in 2009, when emerging economies witnessed huge inflows, Gulf markets got little attention from foreign investors who stayed away mainly due to concerns about Dubai’s debt issues.
The executive believes that with limited opportunities existing in emerging markets currently and improved risk appetite among foreign investors, valuation discounts will disappear.
“It can disappear in the next three months or it can take two years but it will disappear as fundamentals remain the same,” he said.
Silk Invest runs a Middle East-focused equities fund along with two other funds. It also recently launched a new private equity fund focusing on the food sector in Africa.
Bekkali said the Middle East markets also face a perception problem as most investors overlook the fundamentals of the economy and strength of its corporations while perceiving them to be too risky.
“The Middle East has a big perception problem. From a risk point of view, it is not higher than any other emerging market like India, China,” he said.
Bekkali believes that the region is not doing enough to explain to foreign investors about the diverse set of companies or growth opportunities.
“A lot of people when they think about Dubai, only think real estate and tourism. They don’t understand the number of strong companies in the region,” Bekkali said.
The CEO also said that long-term investors like pension firms and sovereign wealth funds need to increase their regional allocation as they understand the region better and have burned their hands previously investing abroad.
“They (sovereign funds) have lost lots of money by investing in the western world and they have a long-term horizon and from that sense it pays off to be investing in higher perceived risk markets,” he said.