Franklin Templeton's Middle East North Africa (Mena) fund is focusing on local companies that have regional rather than global exposure given the turmoil rocking the worldwide economy, its manager said.

'We still think that the global economy will face certain challenges, whether its ability to narrow down budget deficits or the ability to pay down debt,' said Joe Kawkabani, portfolio manager for the $100 million fund and managing director for asset management at Algebra Capital.

'The recent European events are a reminder that things around the world are not very smooth,' he added.

The prospects of a widening crisis in the euro zone sent global markets on a wild ride in May. Markets in the region were not immune to the selloff with indices in Egypt and Saudi Arabia, which had outperformed most global markets, giving back most of their gains.

Franklin Templeton holds a 40 per cent stake in Algebra and the Dubai-based firm runs the Mena fund for the global asset manager.

A focus on Middle Eastern firms is also based on the premise that economic growth in the region remains on track and government spending may not slow because of a recent fall in oil prices, Kawkabani said.

'From an economic point of view, we know that government spending is not based solely on oil, and they don't look at short-term oil prices. These governments generally break even when oil trades at $50 a barrel,' he said.

The manager said such an approach prompts him to invest in companies in the consumer and telecom sectors where growth dynamics depend more on local factors and companies are more immune to a global slowdown.

'Telecom companies are very linked to the market here. One of our largest investments is a telecom company and it's not been subject to any corporate action and it's doing really well,' he said.

The fund does not talk about individual companies or returns as a matter of policy.

Kawkabani said a focus on regional growth would mean staying away from widely followed sectors such as petrochemicals, where the dynamics are closely linked to the global demand and supply scenario.
  
'The petrochemical sector is a very exciting sector but the profits, growth, spending in the space is a function of global spending,' he said.

The fund also focuses on a 'government theme' which is why it seeks exposure in companies whose growth prospects are linked to government spending in infrastructure projects like power, water and electricity.

The manager sees minimal risks to his investment approach in the current scenario.

'You might have periods where the high flyers, high-beta sectors may do well, and since we don't have enough exposure to these, we might be lagging behind,' Kawkabani said.
   
However, the approach helps the fund to protect capital during periods of high volatility and still make money, he said.

'There are certain companies that went up 20 to 30 per cent year to date and lost everything in a week, we don't want to be exposed to this kind of volatility,' he added.

Kawkabani said the fund was gradually accumulating certain banking stocks in the region as he expects lending growth to resume and the risk appetite of banks to improve.
 
'We are not necessarily investing in the cheapest, because sometimes they are cheap for a reason,' he said, adding that the fund was underweight on lenders in the United Arab Emirates.-Reuters