Debt crises in the world have overtaken the Arab Spring as the main concern for Middle East investors. Rattled first by political instability in the region and then by Europe's debt crisis, investors in the Middle East will remain on edge in the coming months, seeking out sparse opportunities obscured by numerous risks. Since the Arab Spring started sweeping across the region, investors have taken flight. However, a sharp equities sell-off was followed by a stabilization. But the seemingly interminable sovereign debt crisis in Europe and a worsening global economic outlook have replaced armed revolt as the top worry on investors' minds. Against this backdrop, speakers at the four-day Reuters Middle East Investment summit, which begins Monday, will provide a gauge of sentiment at a critical time. "If the region were in isolation, investors would be buyers of MENA right now. If you were to take sovereign balance sheets, you'd be a buyer. And on currencies since most of the GCC (Gulf Cooperation Council) is linked to the dollar, you'd be a buyer," said Daniel Broby, chief investment officer at Silk Invest. "But global markets are ignoring that; people are looking at financial contagion from Europe, and are not going to make that call." The evidence that investors are now looking past the Arab Spring is the correlation with global shares. "People understand that the Arab Spring is something that will be with us for a while, whereas the euro zone crisis keeps lurching from one stage to the other," said Abdul Kadir Hussein, CEO of Mashreq Capital. "The environment is risk-averse. We are looking at cash and fixed income asset allocation as opposed to being overweight equities." Most stock markets across the region have fallen by 8 to 20 percent, roughly in line with a 14 percent fall in European stocks and a 20 percent fall in the MSCI World Frontier Market index. Investors worry about Gulf financial institutions' exposure to European debt and any tightening of liquidity. Egypt, where markets were shut for seven weeks amid protests that culminated in the ousting of long-time leader Hosni Mubarak, is the worst performer with a fall of 40 percent. The standout performer in the region is Qatar, the world's richest country per capita, where stocks are down just 3 percent. With macro factors dominant, there is a shift in the way asset allocators view the region. "Unlike in the past when one used to look at sectors, one looks at geographies in the short term," said Florence Eid, chief executive at research firm Arabia Monitor. "Because of global factors and regional political change, one needs to think about which are the more stable countries and discount for global regional factors." The region's top markets, Egypt and Saudi Arabia, are key. Egypt is hungering for the return of foreign investors because the government is paying sky-high interest rates to borrow from local banks to fill a budget inflated by the uprising in February. Saudi Arabia is looking to diversify its economy away from oil. It is spending over $400 billion by 2013 on infrastructure projects, potentially a rich investment opportunity. Political risk consultancy Geopolicity said in a recent report that the countries most affected by the Arab Spring had incurred costs to gross domestic product and public finances of nearly $56 billion, with Syria the worst hit. But a rising oil price has acted as a support. "Progress on corporate deleveraging, more robust banking systems, higher but broadly still reasonable breakevens, a heavy infrastructure pipeline and sovereign wealth are likely to cushion the global downturn," Bank of America Merrill Lynch said in a note.
