Answer to diversification may lie in the middle east market

Today will be the last day of K-Mena's intitial-public-offering period. Last week saw the country's first-ever foreign investment fund to directly invest in Middle East equity launched with much fanfare by Kasirkorn Asset Management. So far, according to a source from Kasirkorn Asset, only slightly more than one-tenth of the Bt1-billion fund has been sold.

The success of the K-Mena fund hinges upon the deflated investment expectation of Bric, or at least what it once was seven years ago - the crown jewel of emerging-market investment and political stability of the region. Recently, cracks were found in the Brazil, Russia, India and China markets, as their economies overheated. The investment story there seems to be losing steam.

Although there are slowdowns on all fronts, the size of these Bric economies is expected to top the gross-domestic-product chart in 2020, according to Goldman Sachs Group's chief economist Jim O'Neil, who coined the term.

No countries are inflation-proof and there is no magic bullet to kill the beast. The International Monetary Fund's first deputy managing director John Lipsky said recently at the Saint Petersburg International Economic Forum that by the second half, "all the major industrial economies will be growing at a below-trend pace". By contrast, growth in emerging-market economies "will still be above their 10- or 15-year averages", he added. At least there is growth, right?

Despite the recent drop, the Templeton Bric Fund has had a jagged rise. Still, that has to be reflected in Asset Plus Asset Management's Bric Fund with its net asset value per unit at Bt9.48.

The Middle East and North Africa are not spared inflation, either. Moody's recent report on the region claims an average inflation rate of 10.4 per cent last year and most of the countries have inflation rates well above the emerging-market average of 7 per cent. Such inflation could easily dwarf this year's 6.1-per-cent GDP growth of the region.

The increases in commodity prices may be a double-edged sword. Already this year Egyptians have taken to the street in protest against higher bread prices. Egypt has the region's highest inflation at 16.4 per cent.

Still there are pockets of good news - Morocco's inflation rate is only 3.4 per cent.

Despite what Kasikorn Asset's fund manager said about the self-containing politics, unrest could easily spill over. Workers in the United Arab Emirates have also recently protested about their diminishing pay cheques. Perhaps it was a coincidence, but the Israel and Lebanon mini-war in 2006 sent stocks in the immediate region diving.

For rich people, to Mena or not to Mena may not be the biggest diversification problem with their relatively greater wealth to go around and their trusty private bankers and wealth managers, who are usually on the lookout for bigger cuts, scouring the earth for ever more novel investment themes and ideas. However, for retail investors these competing and sometimes confusing themes may distract us from the real objective: diversification.

Despite all these economic and socio-political hiccups, taking in the room for more growth, K-Mena - with its fund-of-funds structure - may be the only well-diversified fund in town and hence a better diversification option than other emerging-market funds.