Long-term benefits seen in Mid-East unrest

Civil unrest continues to roll across the Middle East and North Africa, shaking investor confidence both for the impact on the Arab world and the global energy markets.

The Gulf Cooperation Council has unveiled what has been dubbed “the Arab Marshall Plan” which will deliver $20 billion over ten years to Oman and Bahrain, two oil-poor Gulf States facing political turmoil.

But having oil doesn’t guarantee stability, as Saudi Arabia braces for two “Day of Rage” – protests demanding social and political change in the Kingdom. The first took place on Friday

“For Oman and Bahrain the new economic package is welcomed, but it cannot address challenges in the immediate terms,” write Gala Riani and Samuel Ciszuk, analysts from IHS Global. “Meanwhile, the extent of unrest in Saudi Arabia over the coming days [is] likely to show if the spreading popular risings across the Middle East now will start ebbing out, or continue to intensify.”

Earlier protests across North Africa have spilled over into the Persian Gulf, threatening the stability of the region.

Joe Kawkabani, lead manager, Franklin MENA Fund says the turmoil has driven speculators out of the market, to the benefit of long-term investors. His team raised their cash allocation to around 10%.

“During the recent market turmoil we made some changes to the portfolio to achieve two objectives,” he says. “On one hand we wanted to reduce risk in the portfolio so we reviewed every single portfolio company looking to sell or reduce our position if we thought that there would be a serious impact on their operations. On the other hand, we started identifying and gradually adding/building positions in companies where we thought that they were unfairly sold in the market.”

His portfolio had no exposure to Algeria or Libya and only “residual” holdings in one Tunisian company he was already selling off.

Egypt is another story, however. When the stock market there closed at the end of January, holdings accounted for about 11% of the portfolio.

Prior to the upheaval in Cairo, the Egyptian economy was estimated to be growing at 7%, while corporate profits were growing near 20%. With about 80 million people, domestic consumption was also showing “healthy improvement,” he says.

Kawkabani calls events in Egypt “historic”, pointing out that protesters were calling not only for more democracy, but for less corruption, better wealth distribution and more open markets—all of which improve the investment climate.

“We can easily see how this turn of events could be very beneficial for Egypt over the long run, but we prefer to stay cautious for the time being while waiting for stability and more clarity on economic policy,” he says.

Investment decisions will be made on a case-by-case basis and companies with close ties to the Mubarek regime may become less attractive than they had been last year.

“On the other hand, we can already identify certain companies that will not be affected negatively, but are trading at much more attractive levels as a result of the sell-off.”

Kawkabani distinguishes the Gulf economies from that of Egypt, pointing out that the oil-rich states have small, wealthy populations. The majority of the people living in the Gulf States are expatriate workers with little interest in local politics. The poverty that drove the Egyptian, Libyan and Tunisian uprisings is virtually non-existent among the local population.

“We haven’t changed our outlook on the Gulf and it still takes up the large majority of our investments,” he says. “We will look to add to our exposure if we see opportunities created as a result of market contagion from what is happening in North Africa.”