AAA-rated fund manager says GCC increasingly attractive within EM space

Regional markets are trading at lower multiples and there are no currency risks as well, says Kais Mbarek of Dubai’s Integra Asset Management.

Citywire AAA-rated Kais Mbarek, co-founder of Dubai-based Integra Asset Management, believes equity markets in the GCC region are more comfortably placed, as compared to their emerging market (EM) and, possibly, developed market peers as well.

This is because, first, regional markets are trading at lower multiples, and, secondly, there are no currency risks as most of the countries’ currencies in the region are pegged to the dollar.

“These two factors place the GCC equity markets on a much better position than most of the EM space,” Mbarek told Citywire Middle East.

He however added one of the concerns in markets at present is that there is ample liquidity and that will have to come to an end at a certain point.

“Secondly, another uncertainty, that we consider a tail-risk, is around the effectiveness of the Covid-19 vaccines that are being rolled out when it comes to new strains appearing here and there.”


Pockets of inefficiencies

The Integra MENA fund, which Mbarek’s team manages, was up 24.7% last year, while it delivered returns of 22.1%, the year earlier.

On the fund’s performance, he said most of it is explained by stock selection, as market performance did not contribute much during the period.

“There are many pockets of inefficiencies in the market and if you have a team on the ground that applies a clear and robust investment process, you should be able to exploit those inefficiencies and beat the market.”

“Our approach requires a concentrated fund and carries higher risk than a typical mutual fund,” said Mbarek, whose firm’s clients include HNWIs and institutions mainly.

“We invest in under-valued companies and put a lot of focus on the changing dynamics in the company. We are constantly looking for special situations where few changes are taking place. These might be internal or external, including ‘event-driven’ opportunities. We are not looking for companies that are “a steady story” even if they are undervalued,” he added.


A tale of two markets

Since the sharp contraction in the first half of last year due to Covid-19 pandemic, equity markets globally have been on a -V-shaped recovery path that accelerated in the last quarter of 2020.

However, he believes it’s really a tale of two markets, if we look closely.

“While we witnessed some type of exuberance in a few sectors, such as in e-commerce and online centric companies, other parts of the market did not rebound as spectacularly”.

He further noted that on an aggregate basis the global equity markets may look a bit expensive.

However, in reality, it’s more like a barbell situation in which there are companies, as mentioned above, that really benefitted from global pandemic on the one side, while on the other side there are rest of the sectors that are still trading at reasonable valuations and certainly not at bubble type valuations.

According to him, markets in the GCC region fall in the second category.

“They’ve been lagging US markets and the large EM. While the valuations are not cheap, they are not going through the roof as well, unlike some other markets. The region also benefits from few trends, as the rally in commodities and the weakness of USD, that should support earnings in the mid-term. Hence, overall, we are comfortable on the regional markets, at least on a relative basis.”


Value play

In terms of valuation, he said, the UAE, Oman and to some extent Egypt seem to offer relatively better value to investors.

These markets are however not without some internal issues, he added.

“For instance, while there are issues related to subdued real estate market in the UAE, Oman is facing issues of low oil price and its impact on the public finance. However, markets such as Saudi Arabia are trading at higher multiples and have better fundamentals also,” he reasoned.

“Overall, while we don’t make short-term top-down calls, we are comfortable with all these markets and don’t have major concerns with any of them,” he concluded.