Should You Invest in Uncertain Environments?

Investors are in the business of navigating risk and reward. Assessing timing, market conditions, competition, and impacts of technological changes is always a challenge. For those investing in the Middle East, you can add war, political turmoil, and swings in the price of oil. Can assessments of a leadership team or projected earnings hold up when uncontrollable external factors have so much power to make or break a business?

For a time, investors were finding more and more reasons to invest in the region. Foreign investment in the Middle East and North Africa grew more than tenfold, from $8 billion to $126 billion, between 2001 and 2007, according to World Bank data. Then the financial crisis devastated cross-border investing around the world. By 2011 other developing regions had recovered, surpassing previous peak investment inflows—but just as the investing environment improved, the Arab Spring swept across the Middle East, bringing a new wave of uncertainty. By 2015, foreign direct investment had fallen to $51 billion.

Hani Al-Qadi, CEO and general manager of the Amman-based Arab Jordan Investment Bank, discussed his approach to investing in challenging environments in a conversation with Yale Insights. A veteran of more than a quarter century of investment banking in the Middle East, he recommends selecting deals that are fundamentally strong and then requiring enough of a risk premium to be able to ignore the external uncertainties. For those willing to invest for the long term, he’s seen “phenomenal” returns.

Q: What does it take to be successful investing in the Middle East given the conflicts, political uncertainty, and volatility of oil prices?

My take on this is to always, always concentrate on price and value. Ignore the politics. If the fundamentals of the investment are good, then it should be a good investment.

Q: It’s interesting that you say ignore the politics. For some investors, that uncertainty might turn them away entirely.

If investing in the Middle East were just about politics with no opportunities, then obviously, you wouldn’t invest. You need to take the long-term view. You cannot expect to invest in difficult conditions and generate immediate returns. You should also be careful that you invest in opportunities that have strong fundamentals—if you took away the political background, you would grab the opportunity.

If those fundamentals are there, factoring back in the background of violence, crisis, or turmoil doesn’t necessarily mean it’s a bad investment. It just means you have to negotiate a better deal for it. You need a price and valuation that mean you can afford to ignore the politics.

If the investment or the transaction can be done at a good price, then you can ignore the politics. If not, then you shouldn’t ignore the politics.

Q: It sounds like in order to invest in a way that ignores the politics, you have to be aware of the politics.

You do, always, of course.

I have inevitably found out that over the long term, investors who make good investment decisions and seize opportunities at the right time eventually reap the rewards of their investment. This view is coming from 25 years of being involved in investment banking transactions in the Middle East. It is coming out of experience rather than just hoping for the best.

It is possible to invest in difficult conditions. In fact, they should not be overlooked because the returns can be phenomenal. Those who stay away out of fear of difficult conditions will miss good opportunities.

Q: What are the most interesting areas for investment in the Middle East?

While energy and tourism are the most familiar areas for investment in the region, the Middle East is seeing population growth. With that comes the need for services—health, education, food, etc. All these present themselves as unique opportunities to the region.

I also see privatization opportunities. Many of the region’s assets, particularly natural resources, are currently owned by governments. But, because of the pressure on their finances, they will need to privatize many of those assets going forward. There’s a lot of potential there. There’s also potential in renewables, particularly solar energy. Clearly, the Middle East has a lot of sun power.

In terms of infrastructure, it is a fast-developing region that needs a lot of infrastructure, both physical and digital, and the governments of the Middle East are determined to expand and improve on their infrastructure. So that’s another area where I see opportunities in the future.

Q: Some of the political and economic uncertainty has been part of the region for a long time; some is more recent. Did the Arab Spring in 2011 lead to significant change?

Since the Arab Spring, things have changed in the region. There’s more volatility, more uncertainty than normal, particularly because the crises seem to be within rather than between countries. That makes it more complicated.

We have definitely seen a reduction in interest from global investors, but that’s partly due to the global financial crisis of 2008, which led many multinational companies and investors to pull back into their own regions as opposed to being global investors. Therefore, we have concentrated on an intra-regional investing. We have noticed, since 2011, that a lot more of the liquidity generated from trading in oil and other commodities has been kept in the region and has been the driving force behind investments.

Q: Are there countries that have become better environments for investment coming out of the turbulence of the Arab Spring?

One example is Egypt. Out of necessity, Egypt is undergoing a lot of economic reform. They are taking measures, including devaluation of the currency and cutting subsidies to reduce the burdens on the economy. This has created an environment that is quite attractive to investors.

Q: What is the state of banking in the region?

Banking is mostly in the hands of the private sector. Because of the surpluses generated from exporting petroleum, it has become oversized relative to the economies of the region, but, in doing so, it is also a driving force of the economies. The available liquidity has let them be the main investors in the region in the absence of the global investors, generally speaking, over the past few years.

Q: The Arab Jordan Investment Bank purchased HSBC’s operations in Jordan in 2014. Can you walk us through the logic behind the deal?

As an investment bank, we saw synergistic opportunities to expand our commercial banking by purchasing HSBC’s operations in Jordan. We’d been watching the trend toward universal banking going back to the repeal of the Glass-Steagall Act in 1999. We saw this as a good opportunity to move ahead on that type of expansion.

After the global financial crisis in 2008, many multinational banks decided to retrench and focus on their home markets. As a result, they exited out of some of the countries where they had operated. The overall strategic shift by HSBC created an opportunity for the Arab Jordan Investment Bank. If it were not for the financial crisis, I don’t think that would have happened.

The impact of the crisis on Jordan, on the local and regional banks, was very limited because we weren’t integrated into the global banking network, at least in terms of derivatives. We didn’t have many of the toxic assets that damaged so many of the international banks. That meant we were one of the few regions in the world not greatly affected by that crisis.