When the City launches Middle East funds, you need to watch out
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Associate Editor
David Stevenson Oct 23, 2009
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Stock markets around the world have now risen by 50% or more - depending on which particular country or index you're looking at.
At the start of the rebound, most fund managers believed it was a bear market rally. We have no quarrel with that – we still think it's a bear market rally.
But now that markets are at least 50% more expensive than they were six months ago, fund managers have gone bullish en masse, and are launching lots of new funds.
That's enough to get you thinking that the near-term top for global share prices isn't far off. And when several of those fund launches are taking place in some of the more exotic parts of the investment world, such as the Middle East and North Africa (MENA), it's time to be very wary indeed...
Alarm bells are ringing: fund managers are launching new funds
The bulls are back in the majority. "Asset prices will continue to rise, say wealth managers who attended our Wealth Management Retreat in Hampshire last week", says Citywire. The Telegraph reports that City guru Anthony Bolton of Fidelity, who to be fair was one of the few publicly bullish professional investors at the market's March low, reckons the bull run could yet continue for a "considerable" time. They may all be correct.
However, both instinct and history combine here in suggesting that when everyone gets optimistic, it's time to head for the hills. And what really gets the fire alarm ringing is when we see fund managers launching loads of new funds. My inbox is groaning under a pile of press releases punting new investment 'opportunities'.
To cap it all, several of those new launches are in non-mainstream, exotic areas such as the Middle East and North Africa (MENA). Now in the long run, there's a good case to be made for investing in MENA countries – we'll get to that in a moment. But right now is not the time to invest.
Why now's not the time to invest in the Middle East
Why? For a start, a craving for exotica is a sure sign that investors are desperately seeking returns with little regard to the risks involved. As investors watch mainstream markets shoot up, the ones who are sitting on the sidelines start to panic. They look for ways to play catch-up, and start to look for ever-riskier, higher-octane investments that might deliver the gains they feel they've missed elsewhere.
It's a return to precisely the mentality which drove the last boom and bust. In fact, MENA funds "were all the rage last year", says James Phillipps at Citywire. The last time we saw fund managers plugging them in these sorts of numbers was in May and June 2008, and we all know what happened next. Secondly, MENA markets are hardly cheap right now. They may not have been everyone's first-choice investment pick, but someone's been buying. The Nomura North Africa and Middle East index, which is measured in US dollars, is up almost 60% since this year's March low.
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There's another reason to be concerned. As John Stepek pointed out in Money Morning yesterday (Cheap money is all that's keeping stocks afloat - but it won't last), resistance to the flood of cheap money washing over the globe is building. There are fears for example that China's strong growth will encourage Beijing to cut back on its "stimulus" spending, while Brazil has just imposed new capital controls to stem the wave of hot money coming from the West.
A squeeze on global liquidity would be bad news for most asset markets, but particularly more unusual plays such as MENA stocks. So we wouldn't pile in now.
But it's definitely the region to watch
But what about the long term? That's a different story. Take a look at the chart below:
The red line shows the FTSE Middle East and Africa index compared with the blue line denoting the MSCI World index, both shown from a base of 100, ten years ago. Both are measured in US dollars, and dividend income has been excluded.
Pretty clear, isn't it? While investors in mainstream markets have made no profit at all over the last decade – indeed allowing for inflation, they're some way down on the deal – Middle East and Africa players have more than trebled their money.
And long-term, they could have a very fruitful time yet again. That's because there's still a very good long-term MENA growth story, which will revolve around a mix of more urbanisation, industrialisation and infrastructure spending. The Gulf States in particular have money to burn, with the building of the Formula One track at Abu Dhabi and a major highway linking the city to Dubai being just two examples.
Meanwhile, growing populations will mean wealth creation and consumption climbing faster than in much of the rest of the world. That will mean better-than-average profits increases, and the likelihood that share prices will be driven much higher over time.
But to repeat, buying in now could be a very bad bet. Instead, stick the region on your 'watch-list', and wait for a correction.
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