Equity fund Frankfurt Trust said it sees solid banks and a rising population as making Saudi Arabia the best investment pick in the Middle East and North Africa (Mena) region, along with Egypt's banks and Dubai stocks.
Redemptions and market falls have slashed the value of the trust's Emerging Arabia fund from some €400 million (Dh1.99 billion) in June 2008 to €25.5m in early April.
Emerging Arabia fund manager Birgit Ebner said she is hoping for a turnaround in the fund's fortunes as emerging markets rally. She has 29 per cent of the fund in Saudi stocks, which fell 49 per cent last year but have gained 14 per cent since March 1.
The global benchmark for emerging stocks rose some 30 per cent since early March.
The fund also has 11 per cent invested in the UAE, plus smaller holdings in Qatar and Lebanon.
Financials, followed by telecoms and transport, constitute Ebner's the top sectors in the Mena.
"The banks are solid, with a favourable loan to gross domestic product ratio," Ebner said of Saudi Arabia. "And because of the buoyant population, we see a lot of potential for growth," she said on Friday.
Ebner said corporate earnings in Gulf Co-operation Council (GCC) members such as Saudi Arabia, the UAE and Qatar would likely turn around thanks to government spending, even if oil prices remain low.
"Most of the listed companies [in the UAE] are not directly in the oil business, so the oil price has only a secondary effect on them," she said, noting 65 per cent of the UAE's gross national product was from firms outside the oil sector.
Oil plummeted from more than $140 a barrel in July 2008 to less than $35 in February, before recovering above $50 in March.
The stock market of Dubai has fallen some 70 per cent in the past year, and Ebner said it now offers some favourable valuations.
Ebner remains cautious about Kuwait, whose share index has fallen seven per cent so far this year.
"We saw two problems," Ebner said, noting banks were too closely interlinked with the infrastructure sector and some listed companies had subsidiaries that it was difficult to obtain information about.
Ebner put three per cent of the fund in Lebanon, including in firms with rebuilding Beirut's war-torn infrastructure. She also sees potential in Egypt, where the EGX 30 index has dropped more than 55 per cent in the past 12 months.
"The banks are solid because they do most of their lending domestically," she said. "Most workers in Egypt are paid not with a cheque but in cash, so as this changes banks' deposits will be growing."