International investors are becoming more comfortable with the opportunities and risks of the Middle East and North Africa (Mena) region, according to Bassel Khatoun and Salah Shamma, co-heads of equities at Franklin Templeton Middle East.

While investors still often treat the Mena region as a homogenous area, they are becoming increasingly aware of the long-term growth opportunities in individual markets, say Khatoun and Shamma.

“The resilience of Mena stocks when compared with the volatility seen in emerging markets since mid-2013 suggests that investors have become more attuned to the potential attractiveness of the region,” says Khatoun.

The strategy could help investors diversify their portfolios among volatility in other markets. According to Bloomberg data, Mena markets have showed a 52 per cent correlation with the MSCI World and a 14 per cent correlation with the MSCI Emerging Markets index, published by US index compiler MSCI, over an eight-year period.

Perceptions of political risk remain high, but political transition in Egypt and Tunisia, as well as easing tensions surrounding Iran’s nuclear programme, have brought down equity risk premia. Instability in Iraq has caused this to rise again, although it remains unclear how this will play out over the long term.

“With the Franklin Mena Fund, we have started to increase our exposure to smaller, less covered countries such as Jordan and Lebanon,” says Khatoun. “These markets have generally underperformed in the past couple of years, which has paved the way for some interesting opportunities to rise.”

Both countries are witnessing a slow economic recovery, even though spillover from conflicts in Syria and Iraq continues to affect them.

Shamma adds that he also sees upside potential in stocks in the GCC’s banking and consumer sectors, as well as in Egypt, where political and economic progress is being made slowly. The election of new president Abdul Fattah al-Sisi in May is raising expectations for further investment from the GCC, and has improved overall business sentiment in the North African country.

“Outside of the GCC, we have also noticed a pick-up in international investors’ sentiment towards Egypt, which has translated into stronger flows,” he says.

Another development investors are watching out for is the opening up of the Saudi Stock Exchange (Tadawul) to foreigners.

The Tadawul’s listed stocks had a combined market capitalisation of $466bn at the end of 2013, representing more than 40 per cent of the Mena region. At that size, it is hoped the Saudi market may be able to be included in the MSCI emerging markets index if it meets the index compiler’s criteria.

“We believe this would be instrumental in establishing the region as a single, identifiable subset within the general emerging-market universe,” says Shamma.

“Such an inclusion would significantly improve the profile of Saudi Arabia and the region as a whole.”