More international investment will come into the region if Qatar and UAE are classified as “emerging markets” in the MSCI Emerging Markets Index, says a senior HSBC banker.

Currently, Qatar and UAE markets are classified as “frontier” and very little institutional money follows the MSCI Frontier indices, points out HSBC head, global banking, Middle East and North Africa, Paul Skelton.

The MSCI decision on the two markets will be announced around midnight tonight.
“Future inclusion in the MSCI Emerging Markets Index is not a foregone conclusion, but when Qatar and the UAE are successful ultimately, this will then lead to more international investment money coming into the region,” Skelton said in a note yesterday.

According to Skelton, the recent France Telecom acquisition of a 94% stake in the Egyptian mobile phone company Mobinil in a tender offer was a “further step forward” in the regional banking market.

This deal isn’t just significant because of its size – although at 19bn Egyptian pounds it is one of the largest ever cross-border M&A transactions in Egypt — but also because of the fact it shows that a market-changing deal can be achieved despite a challenging macro environment.

“While this is only one deal, and doesn’t indicate a ‘return to normal’, I think it is a very good example of the way we should expect the regional market to continue to develop.

“If we look at the market only few years ago, much of it was private and many deals were executed on a company to company basis within their respective domestic markets. Typically, family-owned companies were making unilateral decisions to acquire a competitor or expand through acquisition. The common theme was that these deals were typically small and done on an ad hoc basis – moreover, the approach and structuring seen in international centres of M&A just wasn’t there.”

The market started to show an appetite for larger intra-regional and cross-border deals. Typically, these were companies looking for faster expansion than available in the private peer to peer or domestic market.

Banks were engaged by companies to help them look for specific opportunities, in specific sectors – complementing their overall regional investment strategy.

Such opportunities were not necessarily immediately apparent to the company. And while these opportunities where often regional in focus, they weren’t necessarily small scale.

“When we advised last year on the rights issue – the raising of capital through the issuance of new shares – for Mannai Corporation and the resulting purchase of 35% of Axiom, this was an international standard deal, but done ‘intra’ regionally,” Skelton said.
The market has started to show a real willingness to open up to international investors – improving standards and adopting higher levels of corporate governance.

While historically many regional entities have had lower levels of corporate governance than those in the West, this is definitely changing and that is a positive step for the region.
The region, he said, has the funds and the willingness to look at international investment opportunities. Regional investors have shown an appetite for international opportunities that complement their portfolios and this will grow.

On whether the local markets will be driven by ‘intra’ region, ‘into’ region, or ‘out of’ region deals in future, Skelton said: “It is likely to be a combination of these”.

However, the regional investment banking market has been massively impacted by the events of the Arab Spring and the fallout from the eurozone. The M&A market is primarily driven by market sentiment and then by the identification of deal opportunities.

He said market sentiment will return but take time. The need is for some deals to come to the market, in size and with success.

“Our pipeline of deals remains strong, but the fragile nature of the market means that timing of execution remains of paramount importance,” Skelton said. For investors, a deal has to fit with their “strategy, portfolio and aspirations”.
Skelton said HSBC “remained positive” on the Mena region and its growth prospects. It has a number of strong fundamentals - such as increasing hydrocarbon wealth and young populations. These fundamentals haven’t been altered by the Arab Spring.
“But what is changing is the level of sophistication of our clients. I think we are seeing the emergence of real international players from the region, who have the skills, funds and the appetite to go where the deals are,” Skelton added.