Commentary

MENA Q4 2024 Manager Letter

January 28, 2025

Bab Bou Jeloud gate (The Blue Gate) located at Fez, Morocco at sunset.

MENA equity markets finished the fourth quarter with returns of 0.7% (S&P Pan Arabian Index Total Return), significantly outperforming the MSCI Emerging Markets Index, which was down 8.0% in the same period. For the full year of 2024, MENA equity markets ended up 6.3%, a slight underperformance relative to the MSCI EM Index which was up 7.5%. Through to the end of 2024, MENA markets outperformed the MSCI EM Index by 43.4% and 17.3% over the last five and three years respectively.

Annual return dispersion among the major MENA markets (at the index level) continued to be high this year. The performance differential between the best (Dubai) and the worst (Qatar) market was 29% in 2024. Interestingly, this has also been the quantum range of returns between best and worst in 2023 and 2022. This high level of dispersion is a particularly desirable feature of investing in the region and one we believe is likely to remain given the composition of listed securities in each market (providing different earnings-factor sensitivities), the presence of domestic capital pools dedicated to each market and, more generally, the relatively low levels of foreign ownership in the region.

MENA equities were put to the test this year as they grappled with an escalation in political risk, lower oil price, high interest rates and incremental supply of shares from initial public and secondary offerings. Our view on this was articulated in our fourth quarter letter of 2023 wherein we described our approach to the Saudi market in particular:

Since the end of the first quarter of 2023, we have become more vocal about our concern on valuation levels in Saudi. During this period, we’ve seen an increase in geopolitical risk, persistently high interest rates, and lower oil prices. None of those factors seem (for the time being) to temper local and regional investor enthusiasm for Saudi stocks, particularly mid-caps and IPOs. We believe it is prudent to avoid being overly exposed to situations where, by our estimates, investor positioning and expectations are excessively high. While we remain constructive on the quality of the Saudi-based businesses we own and the country’s structural growth story…we enter 2024 with lower exposure to these stocks. The Saudi market is highly dynamic, and we expect there will be opportunities to rebuild our exposure to those stocks throughout year.

In the same letter, we cited a preference for owning the UAE:

“We are relatively more bullish on the UAE, focusing primarily on banks and quasi-monopoly businesses like utilities and infrastructure. Benign liquidity conditions and strong economic growth favour UAE banks with a solid deposit franchise and strong lending opportunities in 2024.”

Fortunately, that view has largely played out in 2024 (with some exceptions of course), and we now find ourselves in a situation where our relative preference has reversed in favour of Saudi as valuations appear more reasonable. We spoke about this more constructive stance on Saudi in our third quarter letter last year following our trip there in October 2024:

There are three factors working for the strategy at the moment. Firstly, there are growing profit pools resulting from reforms and demographics which is critical to our investing style – growth. Secondly, in the last two months, the market has begun the long-awaited process of recalibrating its expectations of earnings to levels that we deem realistic and interesting – reasonable valuations. Lastly, the strategy has already begun shifting the portfolio to areas where there is a healthy combination of growth, risk-reward and low investor positioning.”

In other markets, we continue to favour Morocco in the portfolio as it represents one of the best structural economic development and equity stories in emerging markets and certainly the region. While the portfolio in Morocco has experienced some turnover in 2024 (primarily due to an exit of a long-held position in the retail sector), we remain committed to our long-term holding in technology and have expanded the portfolio to include companies in healthcare and financial services.

In Qatar and Kuwait, our statement from last year’s letter remains largely relevant today:

We remain selective, with growth remaining constrained, though we see potential in Qatar’s liquified natural gas value chain and are more optimistic about Kuwait following the appointment of a reformist royal as the new Emir in late 2023.

While our optimism on Kuwait may have proven pre-mature, we believe the direction of travel is positive and have continued to build selective exposure over the year, primarily in banks and financial services.

As for Egypt, we expressed an openness to increasing our small ownership last year, subject to the devaluation of currency and a correction of the imbalances in the country’s trade and capital positions.

Egypt remains a wildcard, with an imminent devaluation likely to be the first step in a long journey towards rebuilding policy credibility with investors. That said, we remain open to increasing our ownership in our preferred Egyptian healthcare and technology businesses if opportunities arise later this year.

The Central Bank and the government of Egypt did eventually capitulate and devalued the currency from just above 30/USD to 50/USD. The devaluation came two weeks after the government sealed a mega property deal with one of Abu Dhabi’s sovereign wealth funds. As a result, we felt more comfortable with the medium-term outlook for US dollar returns on Egyptian assets and stepped up our exposure to our technology company by way of a discounted block transaction in June last year that so far has proven rewarding for the portfolio.

In conclusion, the region passed a particularly testing year in 2024. The structural story for the region remains sound and we are confident it will underpin a powerful combination of a multi-year growth in earnings and a low equity risk premium relative to emerging markets. While it is too early to determine what happens in 2025, a strong US dollar, stable oil price and a Trump presidency all bode well for MENA equities.

We wish you a prosperous 2025 and look forward to sharing updates on our strategy with you.

Vergent Asset Management LLP
January 28th, 2025