Ranking the Mena Markets

ADI is not only a good proxy for the Mena market, but also an outperformer for the region.

Can you rank UAE among the Mena (Middle East and North African) countries? This question might need a World Bank paper to ponder fundamentally on the strength and weakness of the country compared to the region.

The analysis might debate on Oil influence, export trends, EU proximity, worker remittance, food dependence and of course debt concerns. And even if we reach a conclusive ranking, it will be still limited to certain time say 2010 outlook.

There is no qualitative technique to show where UAE or ADI specifically stands when it comes to Mena in the next quarter, next year, the decade ahead.

A question of a decade might also look ridiculous. How can one see so far? And even if one could, we need a way to measure the strategy, vision and other soft aspects for the region.

We may need a Mckinsey or Goldman vision report then.

How can we make research simpler? Let's try.

Mena is an important part of the global economic outlook today. Mena has no standardised definition; certain organisations define the region as making up different territories.

The listed countries are Algeria, Djibouti, Iran, Iraq, Libya, Palestinian territories (the West Bank and Gaza Strip), Syria, Yemen, Bahrain, Cyprus, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, Turkey, United Arab Emirates.

The Mena region's vast energy reserves (60 per cent of the world's oil reserves and 45 per cent of the world's natural gas reserves) make it a vital source of global economic stability.

Six per cent of the total world population also makes it an important growth and consumption market. More than all acronyms an attempt to look at an economic and trade zone above political limitations made the idea extraordinarily profound.

What did we do? The quantitative model filtered the region for trading volume, volatility and market capitalization. Our final sample set covered the following 11 country indices, KWSE (Kuwait), TASI (Saudi Arabia), ADI (UAE), AMMAN (Jordan), QSI (Qatar), BAX (Bahrain), XU100 (Istanbul), TA100, CYFT (Cyprus) and CCSI (Egypt).

We benchmarked all of them with Dow Jones Mena index. Before we crunched the data we observed that a part of the market was struggling back up after the Mar 2009 crisis and a few were near previous highs, a large price performance divergence. Last few features we mentioned about performance cycles.

The quantitative relative ranking technique illustrates that performance is cyclical. The worst performers will outperform and the best will outperform.

We looked at 12 month of data with quarterly performance cycles. Performance cycles rank relative price performance. TA100, KWSE, TASI were the top ranked performers while Amman, QSI, XU100 were the worst. This should surprise the belief that ADI was the worst. It was not.

There were worse performances in the region in the last quarter. The rankings suggest that the top performers are great reduce opportunities and Qatar, Amman and Istanbul indices offer value for the next quarter.

To take a closer look at ADI, we paired ADI against the Mena indices. Abu Dhabi Index ADI should outperform all of Kuwait KWSE, Bahrain BAX and Saudi Arabian TASI. On an aggressive side Short TA100, long ADI is a workable strategy, based on one structures his leverage, non leverage or otc trade.

Markets are more inefficient than believed and it is no surprise that such allocations between regional indices easily diverge 30-50 per cent on an annualised basis. One has to clearly focus on performance more than anything else, be detached, even if it means looking allocation out of local assets and getting into regional assets or going cash. Consistent wealth creation has little place for love for assets. But it is tough to break geographical bias.

The last time we carried a long India, Short China strategy (Feb 23, 2009), the net community bombarded us with comments on rating engineering skills, sector and industry comparison, Tata Nano’s potential of success, resource constraints, population issues, American crisis, tech sector stability – instability, US dollars reserves, macroeconomic issue, consumer market size, growth rates, xenophobia, mules on cracked roads, Rolls Royce, roads of gold, over-glorify their past, rhetoric, redundant models, thinking over writing, no good USA.

Our small note explaining that the strategy pair was inverse a few months back did not get much attention. Even reference to the paper on performance cycles published at Kyoto Journal the same month with performance pairs between Nikkei and Bric countries were piled under geographical bias.

Quantitatively speaking, there could be opportunities which qualitatively we can miss. ADI is a good proxy for the Mena region and regulators and exchanges could harness this and provide instruments for investing community interested in the Mena region to look at ADI ETFs.

Dow Jones Mena index was highly correlated with ADI in the time period under study, with divergences in a 10 per cent band. Investors looking at QSI, AMMAN and CYFT could also look at just ADI portfolio.

Strange as it may sound, financial innovation need more than emotions, it needs rankings.

Email the writer: