INVESTMENT TRENDS: Tough times ahead, but cash is king

building-siteJohn Foster examines retail and private client trends in the asset management market in the GCC and explores what these Middle Eastern investors are looking for.

The global financial crisis hit the Gulf Cooperation Council (GCC) hard in 2008 and in 2010 the pain is still being felt. The most high-profile casualty was the Arab emirate of Dubai, which had built most of
its magnificent, world-record holding infrastructure on cheap debt from global capital markets. Unfortunately when the credit crunch clamped its jaws shut in late 2008, Dubai’s financial airway was constricted and the ambitious emirate’s development was asphyxiated. Almost overnight the city turned into a ghost town, the clanging and banging of construction stopped and many in the expat community – which made up most of the emirate’s population – scrambled for the executive exit lounges of Dubai’s sparkling, newly extended airport.

The repercussions of Dubai’s fall from grace concussed the rest of the GCC, the reverberations of its toxic debt legacy rippling out across the capital markets of other Gulf economies. Association tainted the financial institutions of its neighbours, which led to wholesale credit downgrades on GCC banks by the international rating agencies. When this was combined with falling oil prices and a crisis in confidence in global financial markets, the overriding trend from investors and business people was one of risk avoidance and asset protection. This led to a ‘bunkering’ mentality from investors in the region, which has created an uphill scenario for fund manufacturers – both local and international – trying to develop and market new and existing products for the institutional and retail marketplaces.

In all fairness, fund manufacturers have always had a problem shifting managed fund products in the GCC markets. Part of this was due to the mentality of regional investors – a mix of ‘local’ Arabs and expats – and part was due to the relative immaturity of the capital markets, the dearth of a pension funds industry and the absence of an intermediary, advice-giving, community. These latter three factors are changing as the region’s economies mature, but the mentality of the investors still remains the same.

On a retail basis, Arab investors, the local, indigenous population, have never really taken to mutual funds in the same way as American or European retail and high-net-worth individuals (HNWI) have. This is as much the case in Saudi Arabia as it is the UAE, Qatar, Kuwait and Bahrain. This demographic of investor is cautious; they will invest directly, not through an advisor or fund, on a discrete basis in home stock markets and possibly those of GCC neighbours; they will not usually invest in a managed fund, but will have an appetite for direct real estate investment and an entrepreneurial direct investment in small or family businesses.

Investor profiles change
The expat investor – primarily the white-collared individual from Europe, North America or the management class of NRI (non-resident Indian) has overwhelmingly remitted most investment capital back to pensions funds in their home markets, or invested in direct property in the Gulf, with the most popular real estate investments being in Dubai. However, in both cases this is changing, albeit slowly. The poor performance of the local stock markets, precipitated by severe, periodic market downturns, has seen local investors question their own expertise in stock picking – and in terms of overseas equity, where fundamentally the asset allocation was significantly emerging markets and primarily India and China – their skills at asset allocation. This has created an opportunity for professional investors, and a number of local institutions have started manufacturing locally domiciled, regionally focused mutual funds and offering these to private banking intermediaries and direct to high-net-worth individuals. The local players have been joined by international stalwarts like Schroders, Fidelity, UBS and JP Morgan, who have developed facsimiles of their international products for the local market.

Conversely, expat investors have seen their money locked into a collapsing real estate market in Dubai while their pension fund assets in their country of origin have probably had a torrid time too. Much of their recent investment capital will have been tied-up servicing debt and pension fund shortfalls; however, individuals might want to take a punt on the emerging markets leading the world out of recession and to participate they would likely use a mutual fund.

The fund management companies have been busy manufacturing new products to try and fill these gaps. The Royal Capital Mena Fixed Income Plus Fund, the first fund from Abu Dhabi’s Royal Capital, offers a diversified, risk-controlled exposure to fixed income markets, focusing mainly on the Mena region while retaining the flexibility to invest opportunistically elsewhere. Dubai’s Emirates NBD has also recently entered the fray with the Emirates Mena Fixed Income Fund, an open-ended dollar-denominated fund investing in a portfolio of fixed-income instruments, predominantly from issuers in the Mena region.

“The launch of this fund coincides with an increase in demand for fixed income funds in the region over the past year,” said Deon Vernooy, hyead of Emirates NBD Asset Management. “With recent developments in the regional fixed income fund market, the next three quarters will be an opportune time for investors. There is now increased clarity in the risk/return profiles of existing and new issues providing a more attractive platform for investment.”

Qatar’s Masraf Al Rayan has recently launched  the Al Rayan GGC Fund, a Sharia-compliant value fund that is taking a medium- to long-term perspective, investing in GCC-listed equities as well as fixed income and money market instruments.

The international giant HSBC brings the HSBC World Selection Portfolios to the region. This suite of funds includes globally diversified, multi-asset growth portfolios that can hold both traditional investments such as bonds and equities, as well as modern assets including commodities and private equity.

Ishrat Kiyani, head of premier banking and wealth management, UAE, at HSBC, comments: “The steep declines in stock markets since 2008 have been a painful reminder of the risks inherent with putting all of your investment eggs in one basket. When researching this product launch, our customers told us: ‘I don’t like the rollercoaster effect’ and ‘I’m more interested in preserving what I’ve got than risking it all’.”

It is one thing developing new investment funds, but another thing selling them. This has been the most significant challenge for local and international fund manufacturers. “In the past 12 months the markets have been very challenging. There has not been much appetite from investors and no growth in assets. Risk aversion is very low,” says Shahid Amin, head of asset management for the Global Investment House of Kuwait.

Amin, who deals with HNWIs across the region, has found that they have been shying away from any new commitments in terms of their investment portfolios. In many cases they have been liquidating parts of their portfolios, booking their losses and converting to cash. For those that are maintaining their managed fund portfolios, there remains a bias towards emerging markets, with the Brics and Chindia funds being the most popular.

Most significantly he argues that: “Little has changed in terms of investment selection. The clients that I deal with still invest directly in their own family’s businesses or small businesses, in their local stock markets and in direct, regional real estate. They are not interested in developed market equity or bond funds, and their aversion has only been reinforced by problems with the Eurozone, UK and North American economies.”

Money, money, money
The fact that local investors want to see, feel and touch their investments, and expats’ assets are illiquid or stressed has seen the emergence of cash as a serious investment play. This has been exacerbated by the different dynamics in global and regional banking. In Dubai, for example, many of the banks have been under extreme systemic stress, as their assets are locked up in illiquid real estate investments, and have a large amount of non-performing loans on their books. They are desperate for liquidity and are offering very attractive interest rates on deposit accounts. In some cases, banks are offering up to 9% on their deposit accounts. The story is about local money, as the ‘hot’ money that flooded into the region from Europe and North America, gambling on rapidly rising real estate and stock market prices, has gone.

Gulf investors, who do have access to liquidity, have been placing cash on short-term deposits. In many cases, according to Ruggiero Lomanoco, head of wealth manager multi-investor products (Middle East) for RBS, investors have also been leveraging their position to take advantage of the arbitrage opportunities and borrowing money against their assets from more liquid banks, such as in Saudi Arabia, at low interest rates, to ‘lend’ to less capitalised banks, such as in Dubai. “Private [high-net-worth] individuals with access to cash have been acting as market makers in the regional economy – a role which [before the financial crisis] was being fulfilled by financial institutions.”

Another area he has seen local investors starting to participate in is in international private equity. He has seen families and groups of families clubbing together and investing in private companies in the West. They are now offering capital to entrepreneurs in place of Western banking institutions, which are reticent to lend.

He also claimed that there was “no interest” in equity products from private clients. He concluded that: “People who say that local markets are being driven by international economic events don’t understand what is really happening. It’s all a matter of liquidity.”

©2010 funds global

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