Money: Funds with a near eastern flavour

Alison Eadie looks at investments in southern Europe and the Middle East
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Southern Europe and the Middle East are often neglected in global emerging markets portfolios. Sometimes lumped in with Eastern Europe and Africa, they are rarely a fund manager's first priority. Their performance in recent years suggests such neglect may be justified. Turkey, in the five years to the end of 1995, made a small overall loss and Greece a total return of barely 20 per cent, according to Morgan Stanley indices. These compare with more than doubled total returns from the UK stock market.

The markets do not lend themselves to easy analysis. They tend to move independently of each other, often influenced by domestic rather than external events, and brokers' research is thin in the ground. However, fund managers are increasingly making an effort to cover the region. Abtrust's recently launched Frontier Markets unit trust targets emerging Europe, the Middle East and Africa. Foreign & Colonial manages the Emerging Middle East Fund out of London, although it is listed in New York. Abtrust's Turkey Trust and BZW's Israel Fund, both investment trusts, concentrate on single countries.

Stockpicking funds like Templeton Emerging Markets Investment Trust, which ignores index weightings, has also found value in the region. At its financial year end at 30 April, its top 20 holdings included Banco Comercial Portugues, Alpha Credit Bank in Greece and Eregli Demir ve Celik Fabrikalari, a Turkish manufacturer of flat steel products. Investments in Turkey, Greece and Portugal represented nearly 20 per cent of the trust.

The Portuguese market, up around 20 per cent this year in dollar terms, has been one of the better performers. Templeton's Mark Mobius acknowledges Portugal may not show the explosive economic growth of some Asian economies, but with further privatisation, corporate restructuring and economic reform it will catch up with its more developed neighbours. Growth has exceeded that of many developed countries in the past 10 years, he points out, and the number of listed companies has increased from 24 in 1985 to 169 by 1995.

Whereas Portugal is affected by developments in Europe, Turkey marches to its own, very volatile, tune Having been a hot favourite with some fund managers earlier this year, it has fallen out of favour. The stock market, up 44 per cent in mid-April, is now showing gains of only 11 per cent. Arnab Banerji, chief investment officer at F&C Emerging Markets, says Turkey has some world class companies, but is a macro-economic mess characterised by high inflation and government overspending.

Worries are mounting about the ballooning trade deficit and stability of the currency, says Andrew Elder of Abtrust. The US confrontation with Iraq has also put the oil for food deal into jeopardy. The Turkey Trust has nearly 10 per cent of its assets in cash now against a 3 per cent norm and favours companies with a strong export bias.

Israel is the largest market in the region, capitalised at $35bn (pounds 22bn) or closer to $50bn after including Israeli companies listed solely in New York. In terms of wealth and education it is not a true emerging market. It boasts the highest number of PhDs per head in the world and has GDP per capita approaching $20,000. However, emerging markets specialists consider the stock market underdeveloped and thus within their ambit.

Its performance this year has been poor, with the Tel Aviv index of 100 leading stocks down 16 per cent. Government inability to tackle overspending and continuing worries on inflation have caused weakness. The shekel is also at the bottom of its trading range against a basket of currencies, forcing Bank of Israel intervention.

Lysander Tennant, who manages BZW's Israel Fund, admits: "There are leaky points on the macro side, but on the micro side there are some very good, well-managed companies."

He believes the Israeli market is cheap with prices at 10.5 times this year's earnings against a more normal multiple of 14 to 18 times. "With earnings growth of 10 to 15 per cent in real terms, shares are pretty good value and at a discount to many emerging markets," he says.

Israel's high technology sector is a big attraction and a unique selling point for an emerging market. Cost effective solutions in telecoms and computers, often developed from military to civilian use, are being exported to developing countries. Mr Tennant points out that the peace process means Israel is now selling to South-east Asia and other markets previously closed to it because of the Arab boycott.

Foreign investor interest in Israel is still muted in some quarters. The IMF has just told the government to speed up privatisations to bring down the budget deficit, but applying for such issues can be a frustrating experience, according to Irfan Janmohamed of Mercury Privatisations, and some initial public offerings in the past have suffered from high pricing and an unpredictable auction system or have been pulled at the last moment, he says.

The smaller markets of the region do not seem to have much going for them at the moment. Greece is off the buy list of Abtrust's Frontier Markets trust for being too boring. Mr Elder says: "Nothing is happening and companies are not cheap. We will buy when we like the companies."

Jordan is considered top heavy and expensive. Its stock market is influenced by Israel's and is down 9 per cent this year. Lebanon, emerging from years of civil war, is starting to produce new issues. It only has a handful of listed stocks so far, but Solidere, a conglomerate with property interests, is being listed in Global Depository Receipt form shortly. This will give foreign investors their first opportunity to own Lebanese property.

The oil-rich Arab states are, in the main, not open for investment and are more a source than a sink for capital. Bahrain and Oman, however, allow foreign investment and fund managers including F&C have investments there.

The wealth of the Middle East means local investors sometimes push prices higher than foreign investors would like. Despite this and the less than sparkling performance of stock markets recently, fund managers are paying the region more attention and expect to be doing more business there.

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