​ Global institutional investors and major listed companies from across the Middle East and North Africa are evenly split on the outlook for MENA equities over the medium term: Exactly 50% said “Yes” and 50% replied “No” when asked whether they expect MENA equities to outperform their emerging market peers over the coming three years.   That is just one of the key findings coming out of the first annual EFG Hermes MENA Consensus, a unique real-time survey of 455 institutional investors from around the world and senior executives from 117 major listed MENA companies who gathered yesterday in Dubai for day one of the 12th Annual EFG Hermes One On One, which wraps up tomorrow.   The live survey was a feature of a headline debate on whether “MENA can escape the boom and bust cycle of oil.” The debate featured Hedi Ben Mlouka (CEO of Duet MENA) and Bishoy Azmi (CEO, Al-Shafar General Contracting) arguing in the affirmative, while Ashraf El Ansary (CIO, Exante) and Catherine Bolgar (former managing editor of Wall Street Journal Europe) argued an escape was unlikely.   “This year will be testing for global and MENA markets,” said Simon Kitchen, head of Macro Strategy at EFG Hermes and moderator of yesterday’s debate. “Liquidity is tightening; volatility is rising across asset classes. Commodity prices are collapsing, China is rebalancing and energy markets are undergoing a fundamental change. Meanwhile, populists are gaining ground in both the U.S. and Europe.   * * *   Heading into the debate, the audience of investors and issuers voted on questions including: ●    Which is the greatest risk to MENA equities for the next three years? 51% of respondents said “regional political instability, followed by 20% who picked “disruption in global energy markets.” ●    Which is the biggest risk for global markets in 2016? 80% picked “China’s debt burden,” with only 20% voted for “EU stress and Britain’s Potential Exit from the EU (Brexit).” ●    If you could only invest in one region for three years, which would it be? The United States won by a nose, with 29% of respondents saying the world’s largest economy would be their first choice. One in four respondents chose Africa, while 20% tapped Asia — two percentage points ahead of MENA at 18%. Europe came last with just 8% of respondents saying it would be their only choice.  ●    Which asset class would you buy and hold for the next three years? As you might expect at an equities-focused gathering, 46% of respondents tapped “equities” while 20% of would choose gold, 16% cash, 13% commodities and a modest 6% the relative safety of bonds.   * * *     Al Shafar’s Azmi led the panel discussion, noting that the boom and bust cycle will smooth-out over time as “countries that have depended on oil and not been competitive go through structural reforms.” He pointed to the United Arab Emirates as a perfect example, noting the strides it has taken to diversify its economy and, since August 2015, to slash subsidies. “Will change be painful? Yes — and we’re already in a painful period, but it’s a necessary evil as we build economies that are more resilient and that create smoother growth.”   Speaking against was former Wall Street Journal editor Catherine Bolgar, who said the region continue to suffer from what she called “optimism bias,” suggesting that “You see booms as normal and busts as a surprise. The region hasn’t taken the boom times to invest in the diversification of economies, and if it hasn’t done so before, why would it do so now?”   While Azmi and Ben Mlouka of Duet MENA both saw MENA’s large and uniquely young demographic makeup as significant — Ben Mlouka called it “the largest, most affluent young population in the world” — Bolgar sees it as a “serious challenge” particularly as there is “no entrepreneurial culture ready to take on and diversify the economy.”   Asked to respond to the notion that “it’s too late — you can’t have more than one Dubai,” Azmi noted, “Absolutely not.” These are countries with low debt and good access to capital. They have young, growing populations. Given the right policies, they can still convert into fantastic models — they’re in much better places today than many other countries in the world with aging populations and no liquidity.”   Added Ben Mlouka: “MENA countries can pull lots of levers: They generally have low-to-no net debt. Taxation is still too kind to business — there is room there in many countries. The demographics are a positive, not a negative.”   * * *   In a pause point for a second run of questions, audience members were asked: ●    Will GCC currency pegs change before the year 2018? 68% said “No.” ●    Where will official USD-EGP trade at end 2016? Respondents were uniform in expecting movement on the official rate, with 36% saying EGP 10, 34% EGP 9 and 29% EGP 11. ●    When will corporate taxes be introduced in the GCC? 82% expect taxes will be introduced by 2020 (including 44% who say by 2018), while only 7% replied “Not in my lifetime.” ●    Will we see more major subsidy cuts in Saudi Arabia in 2016? Fully 64% replied “yes” ●    Oil was 44% of GCC economies in 2004-12. Can diversification cut this to 30% by 2025? 62% replied in the affirmative. ●    Where will Brent Crude oil end 2016? Some 81% say between USD 40 and USD 50 per barrel, while 13% chose USD 30 and 7% see it rising to USD 60.  ●    When will Brent Crude next reach $100? Nearly half (46%) replied “Not in my lifetime,” while 42% said by 2025. A more optimistic 12% of respondents said it would happen by 2018.   * * *   Speaking as an investor, Exante’s El Ansary noted that “the timing of the debate is great: Commodities are on the rise year-to-date, with iron up 20% and zinc rising 40%, but oil is down 10%. And from an equities point of view, we’re lagging both developed markets and other emerging markets.”   The challenge, he said, is that when you compare the 2002-07 cycle to 2009-14 — pre- and post-the financial crisis — “energy’s contribution to GDP growth has gone up in the GCC, and GCC economies are have much larger shares of foreign direct investment, grants and central bank deposits to Egypt, Morocco and Tunisia. Everywhere you turn, the petrodollar has become more important, making it even more challenging to structure a case for how our markets can diversify, particularly when you consider technological change in the petroleum industry.”   Shale technology, he said, is closer to a manufacturing process than a traditional E&P operation. The shorter response function and lower CAPEX requirements of shale will eventually dampen volatility in the oil market, albeit at lower prices.   “MENA valuations used to trade at premium to Western and other EM markets,” El Ansary noted. “This was justified because margins were strong. However, they have declined in a structural fashion. They didn’t recover after 2009 because of the slow North African recovery, more competition between retailers, lower net interest margins for banks because we were in a lower interest rate environment, and because places such as Dubai faced competition in the holiday homes market from Greece, Spain and others with lower prices than 3-4 years ago.”   Ben Mlouka, though, is more optimistic, saying, “In terms of valuations, we’re nearing post-Lehman levels in the GCC. Price-to-earnings is at 12x; the bottom in 2009 was 10.5x. Price-to-operating cashflows are at 6.7x against 5.5x at the bottom.” Dividend yields in the region also compare very favourably compared with emerging market averages.   “We’re coming from a low base, but across the spectrum of reforms — from subsidy cuts to opening to foreign investment and reducing foreign ownership limits — we’re moving in a direction that will result in better price discovery, better allocation of savings and better functioning capital markets, all in more robust economies that will include a tax component that give corporations comfort on the state’s long-term direction,” Ben Mlouka noted.   Ben Mlouka’s advice to fund managers: “Look at sectors including education and healthcare. What you want to do is position yourself where there is a structural gap between supply and demand along secular themes. And do your homework at a company level and you’ll find value in energy, where there are still deep value plays.”   * * *   ●    By how much will MENA earnings fall in 2016? Some 43% of respondents see corporate earnings falling 43% this year, compared with 40% who say the tumble will be “up to 10%.” ●    When will Saudi Arabia become part of the MSCI EM Index? The vast majority of respondents say 2018 or later, with only 20% seeing it happening next year. ●    Which country will see the biggest rise in bad loan ratios in 2016? Saudi Arabia (38% of respondents) and Egypt (34%) are seen most at risk. ●    Which sector will see the best stock performance in MENA in 2016? Respondents chose healthcare and consumer staples over telecoms, petrochemicals, and banks. ●    Which MENA market will deliver the greatest returns over the next three years? 43% chose the UAE and 31% Egypt. Saudi Arabia, Qatar and “others” followed.   In addition, the final question of the morning: Can MENA markets escape from oil boom and bust? Respondents were split down the middle — 50-50 for each side.