The Standard and Poor’s 500 Index reached an all-time high last month, surging past its previous record reached in October 2007. It was up 11 percent as of April 25 as investors continue to deploy cash in risky asset classes. The key market concerns have not abated though: the European sovereign debt crisis is still making headlines and the United States’ debt continues to balloon unabated. This month Executive takes investment recommendations from Samer Kanafani, senior equity analyst at MedSecurities, a BankMed subsidiary, and Amin el-Kholy, head of asset management at Arqaam Capital.
Recent rally overdone? While Kanafani is bullish in the long term on US equity markets, he anticipates a correction soon and expects the markets to end around the same level, or slightly higher, by year end. “The world is not yet a happy place,” says Kanafani, adding that the markets are being “injected with steroids”, mainly due to the US and Japanese central banks continuing to print money. Combined with a lack of fundamental economic growth, he remains cautious in the short term.
How should investors position themselves? Kanafani recommends switching out of US cyclical names — which he favored at the beginning of the year — into defensive American sectors such as utilities. He also favors US companies with exposure to emerging markets. His other theme would be to invest in dividend plays, mainly companies with growing yields and buyback programs. In the US, he flags investment bank JP Morgan, fast food restaurant company Yum! Brands and conglomerate General Electric. In the region, he recommends Saudi telecommunication company Etihad Etisalat.
Thoughts on Middle East markets? Kanafani recommends investing in Turkey and Saudi Arabia because of the relative liquidity and transparency of their equity markets. Given Turkey’s equity markets’ recent strong run — up 54 percent last year — he prefers Saudi Arabia, which has less volatility. As for Lebanese securities, he doesn’t see value in the current risk-reward environment due to a lack of liquidity and because “they are very much politicized.”
Top investment recommendations? In the US, he recommends Yum! Brands for their solid portfolio of eateries such as Pizza Hut, Kentucky Fried Chicken and Taco Bell, as well as for their emerging markets exposure contributing to around 50 percent of their sales. He also highlights utilities company Exelon for their defensive nature. As for the region, he favors Dubai-based real estate developer Emaar, given the ongoing recovery of the real estate market, and for its exposure to the retail sector, with more than 50 percent of revenues generated from hotels and mall rentals.
Confidence in the markets on the rise? Kholy sees confidence gradually returning in Middle East and North African markets — his area of focus — from both institutions in the region and foreign institutional investors, which are showing some early signs of interest.
Favorite asset class and countries in the MENA region? He expects equities to outperform fixed income in the future, given the recent solid performance of fixed income. As for his favorite countries in the MENA markets, he is bullish on Saudi Arabia, the United Arab Emirates and Qatar. Despite the strong run in Turkish equity markets, he would also consider selective opportunities in this country. As for sectors, he recommends investing in the consumer sector for the increase in economic activity and government spending — which he expects to result in more disposable income — as well as for the level of innovation being seen at several of the publicly listed companies. He also recommends investing in reasonably priced banks that came off the financial crisis with repaired balance sheets and are growing again.
Interest in riskier markets such as Iraq and Egypt? Kholy is cautious when it comes to Egypt, as it is “still unclear when things will turn around.” He expects more bad economic news from there in the near future. Regarding Iraq, Kholy expects the country to present a “phenomenal investment opportunity in the next decade.” The only issue for now is that the equity markets are relatively small, but he expects that situation to change as more companies list on the exchange.
Top investment ideas? He recommends sticking to stable, high-dividend paying equities in the MENA region. Outside of the region, keep an eye on African markets: “They are somewhat risky and small but offer potentially attractive returns for people who have an appetite for risk,” says Kholy.