LONDON Looking beyond the problems of a region beset by regime change in Egypt, a security crisis in Yemen and civil war in Syria, international investors are seeking out well-run businesses in Middle Eastern and even some North African stock markets.
The Middle East and North Africa (MENA) region is a diverse investment universe which includes both energy importers and exporters, and surplus and deficit economies, but enjoys cross-border trade, investment and even aid links.
Investors have focused on young populations across the region, which they believe will provide future workers and therefore opportunities for business growth. They say businesses are often able to carry on, regardless of political instability.
"Mankind is an animal of habit. After 2-1/2 years we have got used to living with unrest in certain countries such as Egypt," said Nina de Martinis, fund manager at asset management company Amundi, adding that increased government spending and economic growth meant:
"MENA is one of the future development areas of global emerging markets."
Stocks in the Gulf economies of Abu Dhabi, Dubai and Qatar have shown some of the most spectacular performances in the world this year. (see graphic link.reuters.com/zyh97s)
That may not be a surprise, given these economies' safe haven value in a region of conflict.
"Dubai has been a beneficiary of everything that has gone wrong - Syria, Libya, Egypt," said Oliver Bell, fund manager at investment management firm T Rowe Price.
More of a surprise may be the performance of Egypt, which saw the ousting of President Mohamed Mursi last month, less than 2-1/2 years after its Arab Spring uprising.
Egyptian stocks .EGX are up 3 percent in 2013, outperforming the MSCI emerging markets index .MSCIEF of which they are a part; that index is down 11 percent. Some investors are nervous, particularly as stocks have fallen in dollar terms, but others focus on companies that continue to do well.
The first MENA fund opened in 1997 and after a flurry before the 2008 financial crisis, around three MENA funds a year have opened on a net basis since 2009, according to Lipper, a Thomson Reuters service.
Four net new funds have already launched in 2013. Assets under management in dedicated MENA funds rose to $1.9 billion at the end of July, from $1.1 billion in July 2012. (See graphic, link.reuters.com/kad32v)
According to Lipper, MENA equity funds have seen net inflows during the first and second quarters of 2013, the first two straight quarters of positive flows since the beginning of 2008. Net inflows in the first seven months of 2013 were at almost $150 million, equivalent to more than 8 percent of current assets under management. (See graphic, link.reuters.com/qad32v)
Many investors are also buying into to the region via funds investing in frontier markets, a growing asset class which has outperformed emerging markets this year.
"In the UAE, the whole market is a recovery play, whether in real estate or banking, in Qatar there are quality businesses," said Akhilesh Baveja, fund manager at asset management group Charlemagne Capital, adding that increased government spending to prevent political unrest in many Gulf countries had led to a consumer boom.
Investors say the 2009 debt standstill of Dubai World, which sent Dubai's markets into a tailspin, is largely a distant memory. The property sector has returned to life and banks are also benefiting from that revival. Dubai and Abu Dhabi's stock markets .DFMGI .ADI are trading at 4-1/2 year highs.
In gas-rich Qatar, spending ahead of the soccer World Cup in 2022 is also giving the non-energy economy a boost.
The UAE and Qatar got a slightly unexpected upgrade to emerging market status from index compiler MSCI in June, potentially opening their markets to a larger group of investors. The upgrade takes effect in May 2014 and many investors have not yet positioned themselves for it, analysts say.
Many funds also invest in Saudi Arabia - which does not feature in the MSCI frontiers or Arabia indices - because of its large, liquid stock market and strong consumer firms.
Saudi Arabia may open up further to foreign investors, particularly after the kingdom recently moved its weekend to the regional standard of Friday and Saturday, from Thursday and Friday. Stock market reform has been in preparation for years but officials have still not given any clear sign of timing.
Adding to their attractions, Gulf stocks tend to pay large dividends, and can offer a risk premium to U.S. dollar-based investors without currency risk, due to their dollar pegs.
Valuations are starting to get toppy, however. Price/earnings ratios are above emerging market norms, at 12.7 for Qatar and 13.7 for the UAE, but investors are calm.
"There has been a re-rating but UAE does not seem to be overvalued," said James Bannan, senior portfolio manager for frontier markets at asset management firm Bankinvest.
Egypt, while benefiting from Gulf aid and described by some commentators as "too big to fail", is causing more anguish.
Ghadir Leil-Cooper, head of emerging equities at Baring Asset Management, holds only one Egyptian stock: Commercial International Bank (COMI.CA). She went underweight long before the ousting of Mursi.
"We are still underweight. Egypt could go either way. There is still violence on the streets."
But for many investors in emerging and frontier stocks, the trick is to look away from the headline political noise and concentrate on the companies which are effectively managed and enjoying strong revenues, often from overseas businesses.
"Our view on Egypt has always been that the company fundamentals can be divorced from the political dance," said Daniel Broby, chief investment officer at investment management firm Silk Invest.
(Graphics and additional reporting by Joel Dimmock; Editing by Giles Elgood)