Fund managers investing in the Middle East and North Africa are expecting a correction, say Standard & Poor’s Fund Services.

According to the New York-based financial services provider, the rally in GCC markets, which began in earnest at the end of February, cannot last. Indeed, relative to other emerging markets, MENA has underperformed over the six months to June. While the MSCI Arabia index has risen 12.7 per cent, the S&P/IFCI Composite Index-India has gone up 37.8 per cent.

Moreover, managers surveyed by S&P reported strong correlations between US and MENA sectors with some concerned about low liquidity and the possibility of a US sell-off.

“This probably reflects investors’ perception that the MENA region is highly leveraged to a US recovery due to its dependence on oil revenues, whereas other emerging markets are supported by robust domestic demand,” said S&P Fund Services lead analyst Alison Cratchley.

Favoured MENA nations are Saudi Arabia, boosted by government spending, and Qatar. Kuwait however, is generally avoided as it is thought to be dominated by investment and real estate companies, S&P said.

In terms of markets, the S&P Makaseb Arab Tigers Fund is positive on food, beverages and tobacco, while the Makaseb Emirates Equity Fund and Makaseb Qatar Equity Fund favour telecommunications and utilities. The SICO Gulf Equity Fund likes telecoms, consumer goods and defensive industrials, but is wary of financial services and the Dubai real estate sector.