Fortunately for the equity markets, there was no escalation of the unrest to the Gulf Co-operation Council countries which make up the bulk of the investible universe.
The second half of the year should be calmer, and we remain optimistic on the outlook.
The oil price is still at near record levels, which benefits many Middle Eastern nations. Dubai has been the main beneficiary of the unrest, as it is regarded as a safe haven and so has seen increased capital flows and robust tourism. Qatar has also benefited.
We are still cautious on Egypt in the short term, as the market is likely to continue to be volatile until the election has happened and the outcome is known. Since the stock market reopened it has not fallen as much as we think it should have done, as domestic investors have tended to hold onto their assets. We think the risk reward balance is not currently in our favour, but are still positive on Egypt in the long term.
New frontiers
Our view on the New Frontiers markets in general has not changed, in that we still believe valuations are positive and that these markets have the potential to outperform mainstream emerging markets. They are seeing good inflows, and have high commodity prices in their favour at the moment.
More specifically, we are still positive on Africa, in particular Nigeria. The recent elections took place without incident, reducing some of the immediate political risk, so investors can now focus on the benefits of positive demographics, a recovering banking sector and exposure to the high oil price.
We also think the outlook for the frontier markets of Eastern Europe is looking more positive, as they benefit from economic recovery in Europe and from the strength of the euro. There is short-term volatility because of the sovereign debt risk in Southern Europe, but the medium-term outlook is more interesting. The main market we are looking at is Romania.
Asian outlook
In Asia, both Vietnam and Bangladesh have been very weak and so potentially offer opportunities.
These markets always carry an element of political and liquidity risk, as has been clearly demonstrated by events in the Middle East this year. Other than that, the key risk for these markets is that there is some sort of global macro shock and risk aversion returns, driving investors back into safer havens.
Another possibility is given that commodity prices have had a very strong run, there is a chance that there will be a correction. The oil price is particularly relevant here, as although we do not anticipate it will fall, any significant drop would be perceived as negative for many Middle Eastern markets, even though it would not necessarily have a major impact on MENA funds. Continuing high inflation is also a cause for concern at the moment.
