We went to the Fund World Forum in Bahrain last week, it was, as always, a great opportunity to network with our friends across the industry. It was great to see that the general spirit was more upbeat. What struck me, however, is that the dominant topic of most presentations continues to be the oil price. While the price of a barrel plays a crucial role in the region’s macro economics (not to forget investor sentiment), we continue to believe that there is much more to the value proposition that the economies in the Gulf (GCC countries) have to offer.
As we have stressed before, the focus should be on the corporates that make up the economies of these countries, in fact, the only way to benefit from the oil price is generally by investing in the commodity itself as oil companies are national assets and are generally not even listed. On top of all this, the oil industry employs less that 4% of the total local work force!
Simply put, in Europe and the US we pay high taxes, the residents and companies of most GCC countries don’t because their governments mostly fund themselves on oil-related inflows. This is why we believe companies across the GCC have a strong competitive advantage over western companies as this lower fiscal burden results in stronger pricing power. This is the story that investors should aim to capture.
I heard a great quote at last week’s conference: “It has become obvious that the Middle East is actually in the middle of the world”. The economies in the GCC’s immediate neighborhood are home to more than 25% of the world’s population (7bn*25%=1.75bn souls!). These millions of potential consumers have increasing needs (housing, infrastructure, financial services, etc). The companies with pricing power (e.g. low tax burdens) will be in a competitive position to benefit from this growing demand. While it can be argued that the local population in the GCC may find themselves in a state of comfort and therefore may not always be hungry enough to go for it, we should not ignore that there are many in this world that have recognized the opportunity and are setting up businesses in the GCC, precisely to be in a favored position to benefit from these future expansion opportunities. While most companies there require local ownership, it is just a matter of time before they fully realize the potential. There are already many examples of companies who already have such as Air Arabia, DP World, Emaar, Savola, El Sewedy Cables, etc, etc.
We came across an interesting piece of research. Even though it is a bit dated, I thought I’d share with you this week. It is the work of Jean Marie Grether and Nicola A Matys of the Univesity of Neuchatel. This paper proposes a simple measure of the World’s Economic Center of Gravity based on national GDP figures and the geographical location of the world’s most important cities. This measure makes it possible to characterize the location of economic activity around the globe. It turns out that, over the 1975-2004 period, the WECG has shifted towards Asia, and the location of economic activity has become more evenly spread. I have attached a copy of the white paper for those interested as well as a link to the Social Science Research Network where the paper was published in August last year: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=930602
Going forward we will also aim to provide more perspective in Central Asia as our Silk Road Income Fund goes live this week. Last week we wrote up an introductory commentary on the fund and the strategy that drives it. for those who missed this, it can be found on our Silk Invest Updates page on THE SILK ROUTE INCOME FUND AND ‘THE MOTHER OF ALL CARRY TRADES
Please refer to the weekly updates that reports in further detail on:
- More inter-regional corporate transactions in the MENA region
- Improving fundamentals in the GCC
- Challenges and developments in the Maghreb markets
- Updates and the outlook for the main Sub-Saharan Economies and markets
- Stock specific news of companies in the “New Silk Road Universe
Finally, I am happy to report that our funds held up rather well despite the difficult week for global markets. The weekly reports also contain an update on our funds.
We look forward to keeping you updated
Kind regards
Baldwin
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