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Unique challenges

UBS’ Kelvin Tay comments on investment prospects in MENA region

by Thomas Schellen

Executive sat down with Kelvin Tay, Swiss banking stalwart UBS’ managing director and chief investment officer for the Southern Asia and Pacific region, during his first visit to Lebanon. While he notes his enthusiasm concerning the growth of the Asian market, he expresses concerns regarding the MENA region’s attractiveness for investment.

For more on UBS and Kelvin Tay, read “A tougher game“.


From your perspective as a Swiss banker who is based in Singapore, how do Asia and the Middle East correlate?

They are both similar in that they are both export-oriented. The Middle East, however, has actually just one product: oil and gas. The problem is that oil prices over the next 10 to 15 years will no longer be at the level that we are used to. We [at UBS] think oil prices will be flat and there is further downside risk due to shrinking oil imports by the United States. The [other] problem of the Middle East is that political stability is going to be a huge key issue for, I would say, the next three to five years. This is tough to resolve because [the current Middle East conflict] is not a conflict between countries but a conflict along sectarian, religious and tribal lines. These [confrontations] take a long time to play out.


One of the countries that you have reviewed extensively as an Asian strategist is India. Do you see new investment prospects because of the new government headed by Narendra Modi? 

I think [India] is too expensive right now in terms of valuations. You need at least another two or three quarters before corporate earnings growth can actually kick in. There is a lot of sentiment generated from [Mr. Modi’s] appointment and rightly so because he is the first prime minister to win an outright majority in India. If he can’t get things done, no one in India can. Compared to the previous administration, he has a track record of being decisive and a bit more authoritarian than what Indian politicians would like but I think that is what India needs right now.


From your perspective as a private banker, is being authoritarian negative, positive or neutral? 

Neutral. I think it depends on the kind of leadership. Decisive, strong, stability — that’s what markets like. Markets don’t like uncertainty. You can have a democracy and [if] there are no decisions made, it is a disaster like what is happening in Europe. 


In several MENA economies we have seen reassertions of what many observers consider to be authoritarian leadership styles. As far as looking at regional markets from an investment perspective, are you comfortable with Egypt and Turkey?

On the MENA region as a whole, when talking from a global investor’s perspective, I think more people are negative now than they were 12 months ago. At the beginning of this [period] you had the crisis in Turkey sparking up and you had the whole crisis in Egypt; that was the first round of nervousness. The second round of nervousness is now with regard to ISIS. This nervousness is even greater because of the uncertainty of something that is completely unknown. Thus the whole MENA region is not likely to be on the radar screens of a lot of international investors right now. If I have money to invest in only a global emerging markets portfolio, I would probably be more oriented toward Asia ex Japan region than to MENA.


There have been views that the heavy weighting of these Asian markets in the MSCI Emerging Markets index creates a bit of imbalance for investors in terms of finding opportunities. The Gulf constituents of the EM Index, Qatar and the two exchanges in the UAE, have small single-digit allocations in the MSCI EM. Does that make these markets more interesting to you and do you pay attention to them?

I do look at them because they are part of emerging markets, but when you look at these countries you have to look also at their earnings growth potentials. It is not terribly exciting. [Compared with Gulf markets] Taiwan and Korea are very leveraged toward the US economy and if there is recovery in the US coming through, these are the two markets that traditionally do well.


Doesn’t the MENA region offer some good investment prospects because of factors such as demographics and high rates of household formation?

If you talk in terms of demographics, the Middle East cannot compare with Asia. Indonesia has 250 million [people], Myanmar 65 million and the Philippines is 100 million. [In these countries] your income levels are higher and growing, there are investments, people are more literate, unemployment levels are low and household formations are even faster [than in MENA] and there is political stability compared to Africa and to the Middle East. It is a lot more attractive from that perspective.


Global economy and finance have been engulfed for some years in a process that is described as ‘shifting geographies’ toward emerging countries, especially in Asia. What does that mean for your investment strategies?

Asia is undergoing a reform and restructuring process right now in the three biggest countries. China, India and Indonesia, these three countries collectively account for more than half the world’s population. Even if they achieve half of what they have set out to achieve, Asia will be a dramatically different place from what it is today just five years down the road. 


And in your perception the Middle East cannot measure up to that?

In the whole Middle East the society is very, very divided. How do you unite such a divided society? 


Then we cannot hope for an Asian recipe to solve all Middle Eastern problems?

[laughs] At the end of this all is a philosophical discussion about what kind of regime is the most suitable. You [have] got to separate the economic system from the political system. 


Like China?

Exactly. In China, the economic system is completely capitalist. In effect, there is no system in the world that is more capitalist than the Chinese economic system. The political system is completely authoritarian. But without this authoritarianism, the capitalist system and the economy would not have been able to thrive. It is such a big country, and it was developing, [so] you need an authoritarian system. 


So we can fairly assume that you do not subscribe to the theory that democracy is the precondition for wealth?

No, certainly not. People think it is but it is not, even in Europe. This is my personal view and I think the irony is that China needs a bit more of the European model, and the Europeans need more of the Chinese model. The Chinese have no social security, no safety network at all; so they are insecure and save a lot, which in turn drains the economy because nobody spends. Europeans don’t save, because they know ‘if I am out of a job I can depend on the state’. That is why I think both have lessons to learn from each other.

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Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail

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