Whilst traditional emerging market equity investors remain focused Asia and South America, the more experienced manager selectors are watching to MENA.
Of the 24 countries contained in the MSCI Emerging Markets Index, 4 countries are silently and steadily gaining importance. The MENA markets, comprising of Kuwait, Qatar, Saudi Arabia and the United Arab Emirates (UAE), have seen a 500% increase in their index weighting over the past 6 years, to just under 8% as of end 2022.
To put this into perspective, the MENA index weighting change equates an annualised increase of around 30% per annum. Over this same period, the MSCI Emerging Markets Index had an annualised return of -1%. Do the math.
To just view an allocation to MENA today as taking a view on oil prices, would be short sighted. Such an approach is misaligned with reality, and the ambitions of the Gulf Cooperation Council, which also includes the MSCI frontier markets of Oman and Bahrain.
Today there is a broader economic and social agenda across the region, which recognises the need to diversify their reliance on petrochemicals. The momentum behind this drive has only increased as developed nations crank up their commitment to net-zero carbon emissions. As such, the region is investing smarter and strategically to propel the long term transition of the region. They are using their Sovereign Wealth Funds wisely.
From an investors perspective, opportunities to tap into this dynamic exist in the obvious sectors of renewables, tourism, real estate and infrastructure. But they come with the added benefit that the country has seen the lessons and experience from China's growth path up the value chain over the past 2 decades. And in particular the need to avoid the dangers of excessive debt, over supply of real estate, and infrastructure projects designed to stimulate growth as opposed to fulfilling a purpose. The risks in the region are arguably different than those of China at the turn of the century.
On the ground there is even more to discover, as each country creates it's own new local economic identity. The region benefits from a relatively young and wealthy workforce that is being incentivised with social reforms and inclusivity, not seen in a generation. Both woman and men are allowed and expected to play their part in this new future. Increasing home ownership, better access to education, modern hospitals, and white collar jobs at fintech firms, all form a part of this microeconomic revolution.
These factors, together with stable or increasing birth rates, low or decreasing mortality and dependency rates, create a powerful setting for strong economic growth. The next 10 years could be transform the region, as the grand vision takes shape.
