An uneven global economic recovery vulnerable to increasing Covid-19 cases is said to be a primary factor behind the asset management industry’s negative outlook for the coming year, according to rating agency Moody’s.
However, for the Gulf Cooperation Council’s (GCC) asset management sector, the growing demand for Islamic banking and the opening up of markets to foreign capital all offer growth opportunities.
The annual Moody’s Investor Service outlook, published on Tuesday, highlighted that the sector finds itself in a challenging operating environment due to increased market volatility and a shift to more conservative strategies that dampen revenue.
Lower risk appetite is stunting organic growth, according to the credit rating firm, as demographic trends in advanced economies are driving asset drawdowns.
According to Moody’s assistant vice president, Rokhaya Cisse, the asset management industry is ripe for consolidation as it is fragmented with the top 10 firms taking 35% of global market share and “oversupply” of mutual funds.
Traditional active management remains out of favour with investors, and fee pressures have been accelerating in commodity-type products. “Especially in the US, larger banks and insurance companies will be formidable bidders for asset managers that can increase their own competitive edge,” Cisse added.
However, the report also highlighted some potential bright spots within the GCC asset management market. These included the opening up of GCC markets to foreign capital, as seen by the withdrawal of caps on foreign ownership limits.
In addition, the inclusion of Saudi Arabia, Kuwait and the UAE on major investment indices should see a large inflow of foreign investment capital as passive players broaden their coverage universe.
The report also notes that the growing demand for sharia-compliant investments in well-established Islamic banking sectors, such as the UAE, is another area of potential growth.
Other areas expected to attract asset flows over the next few years include alternatives, ESG, and outcome-oriented products and services, such as managed retirement accounts. It stated that the overall share of ESG assets under management is small at present but that the potential for growth is “significant”.
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