في أسواق رأس االستثمار محور الجلسة: المال

تحديات االستثمار في :عنوان الورقةأسواق رأس المال الناشئة: الخيار بين

التكامل واالنغالق

CFA عودة حبش، مقدم الورقة:

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• The IMF has put global economic growth for 2009 at 3.0%, driven primarily by growth in emerging economies

• The IMF expects emerging economies to grow by 6% in 09

• We believe there is some downside to these estimates

• More recent estimates have put 09 economic growth at 2.4% with 0% growth in developed economies (Bloomberg)

• This discrepancy in economic growth comes a long way in supporting economic decoupling theory

 2008E2009F2010F2011F2012F2013F

Developed 1.51%0.47%2.01%2.89%2.77%2.52%

Emerging6.87%6.05%6.72%6.86%6.92%6.92%

MENA6.83%6.05%6.16%5.51%5.60%5.60%

Global3.91%3.03%4.21%4.78%4.80%4.71%

Source: IMF

Real GDP Growth (%)

0%

2%

4%

6%

8%

10%

2003 2004 2005 2006 2007 2008E 2009F 2010F 2011F 2012F 2013F

Developed MarketsEmerging MarketsMENA

Is Economic Decoupling History ?

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• In the last decade, emerging market equities have posted a CAGR of 6.6% compared with -1.3% for developed market equities

• This outperformance reflects much stronger economic growth in emerging economies over the period

Value of $100 invested on Jan 1, 1998

-

50

100

150

200

250

300

350

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

MSCI Emerging Markets

MSCI World

Emerging Markets Outperformed

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• Volatility in emerging equities has also been noticeably higher than that of developed market equities

• Post 2002, an increase in funds dedicated to emerging equities have led to an exponential growth in capital inflows which led to significant increase in volatility

• On a reward-to-risk ratio, emerging equities significantly outperformed developed market equities

Volatility

0

10

20

30

40

50

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

MSCI World

MSCI EM

Russian crisis

Capital inflows to Emerging Markets Increase

Reward-to-Risk Ratio

0.27

-0.08(0.1)

0.0

0.1

0.2

0.3

MSCI EM MSCI WO

Source: Reuters, Global Investment House

On a Risk Adjusted Basis, EM’s Also Outperformed

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Correlations with MSCI World Index

(0.20)

-

0.20

0.40

0.60

0.80

1.00

2003 2004 2005 2006 2007 2008

MSCI Emerging MSCI BRIC MSCI Arabian

Value of $100 Invested on January 1, 2008

40

50

60

70

80

90

100

110

Jan-08 Mar-08 May-08 Aug-08 Oct-08

MSCI Arabian

MSCI Emerging

MSCI World

Contagion denominates

Source: Reuters, Global Investment House

• Historical correlations have increased noticeably since 2003 on the back of a significant increase in capital inflows globally and capital markets have become more integrated

• However, emerging equities have shown to offer significant diversification benefits as a result of their low correlation with global equity markets

• But historical correlations are irrelevant in volatile capital markets

• Contagion often dominates and investors lose the benefits of correlations when they need them the most as shown most recently in 2008

Correlations Versus Contagion – Contagion Wins

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Challenges of Investing in Emerging Capital Markets

Market Illiquidity Relatively Illiquid Markets High Transaction Costs High Illiquidity Premiums

Risk & Return Measurements Applicability of Financial Models (CAPM) Measurement of AppropriateDiscount Rate

Information Inequities Insider Trading Domestic Vs. Foreign Information Advantage Financial Disclosure

Investability of Emerging Markets Limited Foreign Ownership Low Free Float Discriminatory taxes

Major Challenges

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Capital Markets Integration – Empirical Evidence

Source: Bekaert and Harvey (2003), Emerging Markets Finance, Journal of Empirical Finance, p.7

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• Returns: average returns decrease after financial liberalization.

• Volatility: There is no significant impact on volatility

• Correlation & Beta: correlation and beta with the world market increase after equity market liberalization

Impact of Equity Market Liberalization on Returns

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

Avg AnnualGeometricReturns

AvgAnnualizedStandardDeviation

Correlationwith World

Beta withWorld

Pre

Post

Source: Bekaert and Harvey (2003)

Empirical Evidence on Market Integration

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MarketAssumption

EgyptThe EGX is our base case integrated MENA equity capital market

Saudi

The Tadawul is our base case for a segmented MENA equity capital market

Palestine

The PSE is our extreme case segmented MENA equity capital market

• MENA equity markets vary in terms of level of integration with global equity markets

• This enables us to assess the impact of integration on the risk-return profile on markets with varying degrees of integration

• We use a three MENA equity market sample of Egypt, Saudi, and Palestine to conduct our analysis

Equity Market Integration in a MENA Context

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• All else equal, the net effect of foreigners has been very positive to equity markets in our MENA sample over the last decade

• Egyptian equities posted an annual growth rate of 25%, significantly outperforming Saudi and Palestine equities that recorded returns of 15% and 13%, respectively

• However, the foreign investor effect has also been prevalent on the downside as demonstrated by Egypt’s year-to-date performance

• Palestine, our extreme case segmented market, has significantly outpeformed in 2008

Value of $100 invested on January 1, 1999

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Palestine Saudi Egypt

CAGR (Egypt) 24.5%

CAGR (Saudi) 14.5%

CAGR (Palestine) 12.7%

Egypt equity sell-off triggered by foreigners

Results of Our Analysis (1) Returns

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• Our results show that Palestine is the most volatile market over the last ten years compared to Egypt and Saudi

• For Palestine, 10 year volatility is skewed by a one-off year in 2005

• Segmented MENA equity markets have exhibited lower volatility than their integrated counterparts based on our three market sample

• This supports our conviction that segmented equity markets are less vulnerable to exogenous shocks

Returns Volatility (10 years)

0% 5% 10% 15% 20% 25% 30% 35% 40%

Saudi

Egypt

Palestine

Annual Standard Deviation

0%

10%

20%

30%

40%

50%

60%

70%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Palestine Saudi EgyptAl Quds Index appreciated by 307% leading to exceptionally high volatility

Results of Our Analysis (2) Volatility

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• Based on 10 year monthly correlations, we find that correlations with global equities are highest in Egypt

• If we narrow down our correlation period to the last five years, we even find negative correlations in Saudi and Palestine, and more pronounced correlation with global equities in Egypt

Correlations w ith MSCI World (2003 - 2008)0.29

-0.01-0.04

-0.05

0.05

0.15

0.25

0.35

Al Quds Index Saudi All Shares Index CASE 30 Index

Correlations with MSCI World (1998 - 2008)

0.03

0.08

0.27

0.00

0.10

0.20

0.30

Al Quds Index Saudi All Shares Index CASE 30 Index

Results of Our Analysis (3) Correlations

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Bear Stearns shares plummet as it seeks emergency funding

Lehman Brothers bankruptcy

Federal takeover of Fannie Mae & Freddie Mac

Joint central bank actions / Equity short-selling ban

U.S Government rescue plan proposal

U.S Congress passes rescue plan

Source: Reuters

Timeline of Recent Market Developments

Value of $100 Invested on January 1, 2008

10

30

50

70

90

110

130

150

Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08

Palestine Egypt Saudi Arabia MSCI World MSCI EM Baltic Dry Index WTI

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• MENA-oriented fund managers may be inclined to increase their allocation toward segmented equity markets and reduce allocation toward integrated equity markets when they expect exogenous shocks to the global financial system to increase

• Year-to-date, this strategy would have held correctly in Palestine (overweight,YTD = +3.9%) and Egypt (underweight, YTD = -53.6%)

• • However, in Saudi, we believe local market factors have dominated

on the downside (overweight, YTD = -44.2%)

• Our results put forth a strong case for fund managers to underweight integrated / overweight segmented MENA equity markets when global equity markets are in turmoil, and take an opposite position when conditions are conducive to global equities.

Recommendations

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