Capitalising on recovery

by John Butcher

3 Dec 2010
Feature, Interviews

Launched in 2008, alternative asset manager Duet Mena looks to capitalise on trends in the Middle East as it emerges from the global financial crisis. Hedge fund opportunities have risen significantly, according to the firm, while barriers to entry offer protection from a flood of competition. Having lagged behind other emerging markets in recovery, Mena is now in the final stages a bounce-back that Duet is poised to tap into, says Hedi Ben Mlouka, the company’s CIO.

MENA FM: What is the structure of Duet Mena and what interests does it have in the Mena region?

HEDI BEN MLOUKA (HBM): Duet Mena is an affiliate of London-based Duet Group, which also has offices in the US and Asia. Duet Mena is based in the Dubai International Financial Centre (DIFC) and is a fully fledged asset manager for the Middle East and Africa with one of the most experienced investment teams in the region. We currently manage one of the largest hedge funds dedicated to the region and are in the process of launching new funds that will tap in the opportunities that emerged post-crisis in the Middle East and Africa.

MENA FM: What is the company’s investment philosophy and how does this tap into Mena?

HBM: The company’s philosophy in making investments in the region builds on our capacity to identify pervasive secular trends, isolate the companies that would benefit most of these trends and position our investments accordingly. We use in-depth fundamental analysis to identify these trends and companies, coupled with quantitative analysis to spot the right entry (and exit) points and take advantage of shorter term opportunities in the market.

MENA FM: Is the firm interested in any high-risk, high-reward strategies, such as investment in Iraq?

HBM: Although we see value from time to time in such instruments, we tend to shy away from them as we have decided strategically to keep our funds very liquid. This allows us to remain nimble and adapt to market situations rapidly.

MENA FM: How has the investment landscape changed since the financial crisis? Has this created any opportunities for hedge fund managers?

HBM: We believe the opportunities for hedge funds in the region have risen dramatically post-crisis. Pre-crisis, capital and liquidity was so abundant that almost every asset class here was in a bubble mode by the middle of 2008. Today, you can identify good, profitable and sustainable businesses with very reasonable valuations and at large discounts to its other emerging markets peers. In fact, the lack of liquidity and risk aversion in certain markets has opened vast opportunities for us. Needless to say, the lack of participation of global hedge funds in the Mena region post-crisis keeps our competitive advantage intact for arbitrage opportunities.

MENA FM: What risk factors are there to investment in the region?

HBM: We are generally optimistic on most Mena markets. However we do not view Mena as one block, rather we look at each country and develop a view as each country has its own set of challenges and opportunities. The dynamics of Egypt are far different from the dynamics in Qatar. This is reflected in the performance of each of the countries and their correlation to each other, which is extremely low. Kuwait will trade on its own set of fundamentals while Oman and Qatar have their own set of catalysts and risks. Without highlighting a specific country, I will go through a list of both positives and risks.

In terms of opportunities, there are countries that will benefit from rising government expenditures that should trickle down to the private sector. The demographics of the region should also enable governments to continue to spend on infrastructure-related projects rather than being burdened with healthcare costs for an aging population. The end result should be a world-class infrastructure that could attract businesses and start-ups that will employ this young demographic.

In the medium term, we believe inflationary pressures will become a challenge as governments balance spending plans with overheating economies. At some point, the region is going to need to seriously rethink its dollar peg as it will only exacerbate inflationary pressures. The difference between the earlier part of the oil cycle and this time around will be the allocation of capital. Previously a good portion of the excess capital was sent out of the region. This helped to sterilise local currencies and put a cap on inflation. This time around we see more and more evidence that countries are keeping capital at home. While this is part of the investment thesis for the region, it will ultimately be one of the main drivers of inflationary pressures.

MENA FM: What barriers are there to hedge fund investment in the region?

HBM: The most important barriers for hedge funds to invest in the region remain the size of the market (and sometimes its liquidity) and certain foreign ownership restrictions. You need a good understanding of the micro-structure of the market and its regulatory framework to take full advantage of the opportunities in this region. We have dedicated a lot of effort in building what we believe today is the most sophisticated and solid platform to invest in the Middle East and Africa. We do not see the above mentioned barriers as disadvantages, in fact they are exactly what keep us in the unique position we feel we are in today.

MENA FM: There has been a lag in recovery in the Mena region compared to other emerging markets. What are the reasons for this and where do you envisage recovery coming from?

HBM: Yes clearly Mena markets have lagged behind other emerging markets in the latest recovery. But that is not a surprise, given the crisis started almost a year later here and probably hit some countries even harder than most other emerging markets as they got caught in highly leveraged situations when capital markets suddenly shut down. Also, some countries in the region have deliberately not chosen to immediately pursue a proactive policy in countering the effects of the crisis and only recently have they started to stimulate the local economies by laying out their aggressive spending plans for the coming years. We believe we are now witnessing the final steps of the recovery process in the region, namely the final reconstruction of bank balance sheets and that we should see credit expansion resume soon. The macro picture has already improved substantially and capital markets have opened again, the resumption of strong growth may be much faster than most people think.

MENA FM: What events could boost investment opportunities in the Mena region?

HBM: Governments’ spending plans and positive commodity trends will help. However, increased transparency and more foreign-capital friendly regulation would speed up the foreign flows to the region and can boost the economy in the medium term. The inclusion of more countries of the region in the MSCI EM index could also be a major trigger to channel more flows to the region.

MENA FM: What view do local and foreign investors have on the region, and how do their perceptions of it differ?

HBM: Foreign investors tend to look at the region as a pure commodity play. We believe that’s really a very small part of the picture and indeed hides a much more interesting story of the region: Egypt and Saudi for instance, are very compelling consumer plays. Foreigners also tend to look at the region as a block driven by the same economic factors whereas in fact it is a very diverse region, where each country has its own dynamics and economic drivers.