The oil price is having more of an impact on the Middle East than the current diplomatic tensions between Iran and Saudi Arabia, according to frontier markets specialist Dominic Bokor-Ingram.
Speaking after recent political incidents, which included the execution of Shia Muslim cleric Sheikh Nimr al-Nimr and the recalling of diplomats from Iran, Bokor-Ingram said his team had already reduced exposure to Saudi Arabia.
This had seen Bokor-Ingram and Citywire + rated Stefan Bottcher, who co-run the Charlemagne Magna New Frontiers fund, cut exposure to Saudi Arabia over the past four months from 12% to 1% due to the lower oil price.
‘I don't see an escalation of the politics right now, but the low oil price is defiantly causing more problems,’ he told Citywire Selector.
‘I don't think Iran at this point has any interest in any kind of war with Saudi Arabia. This might be trying to deflect attention from the fact that the oil price is very low and government spending will have to fall and that is going to hurt the populations of both countries.’
Bokor-Ingram said the impact of spending by the Saudi Arabian government on companies was substantial.
‘With oil at $35 the Saudi government has a lot less money to spend. We had a holding in an education company where its biggest client was the government who wanted to increase the number of people speaking English, so were spending a lot of money on English as a foreign language courses.'
‘With the Saudi government not having enough money to spend, it is one of the companies that could be seriously impacted by budget changes,' he added.
Expanding Kuwaiti economy
While other countries in the region, such as Qatar and Bahrain, rely on revenue from oil and gas, Bokor-Ingram said Kuwait is moving away from the sector and valuations have decreased. He currently holds 8% in the country and two Kuwaiti financial companies are in the top 10 holdings.
‘There does seem to be a real move in Kuwait now towards finding ways to expand the economy away from oil and gas and so there are a couple of companies we think are now interesting, having not been for some time,' Bokor-Ingram said.
'The way Kuwaiti politics has worked for years is that nothing ever gets done because decision making is very difficult. That has changed recently and decisions are starting to be made, major projects are started to be implemented and that is helping bank lending and helping the construction industry.’
The Charlemagne Magna New Frontiers fund returned 23.3% in US dollar terms over the three years to the end of December 2015. This compares to a rise of 16.3% by the MSCI Frontier Markets TR USD over the same period.