Gaddafi and the markets: is it time to buy on the bullets?

How will the death of Col Gaddafi affect investment markets?

After the death of Colonel Gaddafi, investors seeking early exposure to emerging markets are asking whether it is time to buy on the bullets.

But, while the early bird is said to get the worm, it is equally true that the early worm just gets eaten. Risks are high in the Middle East and North Africa (MENA), a region avoided by most emerging markets funds, and the Arab spring might yet turn into an Arab winter.

Andrea Nannini, manager of HSBC Middle East and New Frontiers fund said: “Libya did not really have a proper stock market so it was always peripheral from an investment point of view. The economy has been closed for many decades, so a part from oil and gas investments from the international majors, there was relatively little investment from neighbouring countries.

“Despite the initial enthusiasm, the transition process will likely be long, complicated, and volatile, just as previous examples in Iraq and Egypt have shown. Medium to long-term, there will be be very interesting opportunities in Libya as the reconstruction process unfolds. This will present opportunities for companies investing there.

“Generally we think the Middle East should do relatively well in the current volatile global environment. These countries are benefitting from years of high oil prices which meant they have accumulated vast wealth and can stimulate economic growth without generating fiscal deficits, unlike in Europe and the US. In North Africa we see very strong long-term potential due to the strong demographics and consumer demand story, but see challenges in the short-term due to the political transformation in many of these countries.

“Valuations in the region are cheap and foreign investors are generally under-invested in the region, which partly explains why the region has performed so well in relative terms over the last few months during the volatility in global financial markets.”

But Dan Morris, market strategist at JPMorgan Asset Management said: "I believe the recent events in Libya will not have a major impact on oil prices. Gaddafi's capture always seemed inevitable, so markets had already factored in the return of the country's oil production. Events in Europe are going to be much more influential over the next few weeks."

David Coombs, head of multi-asset investments at Rathbone Unit Trust Management, started building exposure to emerging markets including MENA earlier this year but warned that investors should still treat the asset class with care. He said: “We started to sell down those markets around September 2010, when valuations were looking rich, on a relative basis.

“By December this view had become more or less consensus, and the subsequent uprisings in the MENA region only served to illustrate that a political premium is still required.”

Rising appetite for emerging markets is also reported by Rod Aldridge at Barings Asset Management who said: “We are seeing an increasing number of investors looking for exposure to emerging markets year-on-year and we anticipate this trend will continue given the enormous potential for growth compared to developed markets.

“Clearly investors are seeing the benefit of diversifying their investments as they opt to invest across a number of regions within emerging markets; which is important given each region varies hugely in terms of the risk/reward profile it offers. Investors should always remember that emerging markets can be very volatile and investing in them many not be suitable for everyone.”

That caution was emphasised by leading independent financial adviser Mark Dampier of Hargreaves Lansdown, a long-term emerging markets enthusiast who remains wary of short and medium term risks: “I don't at least yet buy MENA funds as I prefer global emerging markets funds. There will continue to be much social unrest in the MENA region and eventually the Saudis will be hit.

“It is probably still too early to buy most emerging markets. We really need to see interest rates falling but we are getting closer to that point which may occur, perhaps, at end of year.”

Some ethical investors may consider it in poor taste to even talk about profit opportunities that may arise from a bloody revolution, while others believe emerging economies need the developed world’s capital more than its sympathy. For now, though, most emerging markets experts argue it is too early to increase exposure to the MENA region.