Our panel in Abu Dhabi discussed sovereign wealth funds, plans for the UAEâs second financial free zone, and memories of unscrupulous wealth managers. Chaired by George Mitton.
Ali El Adou, SVP, asset management (The National Investor), Karine Kheirallah, director (Falcon Private Financial Advisory)
Sachin Mohindra, SVP and portfolio manager (Invest AD), Jon Titone, product development head, custody department (National Bank of Abu Dhabi)
Mark Watts, MD and CIO, asset management group (National Bank of Abu Dhabi)
Funds Global: The index of the Abu Dhabi Securities Exchange rose more than 70% in the 12 months ending at the start of April. Can it continue to rise or will it hit a peak soon?
Sachin Mohindra, InvestAD: There are two reasons for the rise, one is the risk normalisation trade in the UAE and particularly in Dubai, and the other one is the improvement in fundamentals. Earnings growth is positive, profitability is improving, return on equity continues to rise for some companies, dividend yields are still attractive, cash flows are improving, and balance sheets are being restructured for the better.
Moreover, macroeconomic factors remain encouraging. The Abu Dhabi Executive Council recently announced a set of projects in addition to the close to $150 billion which was announced over the last two years. The urban plan will be supportive of growth whether it is in infrastructure creation, infrastructure modernisation or social infrastructure creation. Dubai’s trade and tourism driven economy remains robust as well.
There are also softer issues which will keep the market positive. The Securities and Commodities Authority (SCA) has made investor relations mandatory which is a positive sign. This will inspire confidence among institutional investors as well as international investors. However, investors must still focus on fundamental research and careful stock selection for sustainable returns.
Ali El Adou, The National Investor: Fundamentals of the economy have improved dramatically over the past two years. There is a sizeable spending programme by the government on infrastructure, education, and oil and gas. However, the Abu Dhabi stock exchange is mainly composed of banks and real estate companies, which does not reflect the drivers of the Abu Dhabi economy.
At current valuations, many private companies will be incentivised to go for initial public offerings (IPOs) which will create more depth to the exchange. When compared to emerging markets, the UAE is trading at a premium. But this premium is warranted due to higher growth rates compared to emerging market countries and a budget surplus which is driving the investment programs of the government. In addition, investors prefer the UAE due to the currency stability – the peg to the US dollar.
Mark Watts, NBAD: We’ve had a re-rating. We’ve gone from a market that was fundamentally cheap versus the rest of global emerging markets post-2008 to one that is on a par. On some measures, we might look slightly expensive now, but just because something is expensive relative to something else doesn’t necessarily mean it’s going to fall.
We’re still seeing double-digit earnings growth which is attractive in itself and we’ve mentioned the macro picture, which is outstanding. If you look at most emerging markets, you see large current account deficits, the persistent need for overseas capital, budget deficits and debt. If you look at this region, we have current account surpluses, extremely low debt levels and budget surpluses backed by hydrocarbons. Growth is driven by infrastructure plays, developmental plays, etc.
Karine Kheirallah, Falcon: The macro picture has been improving over the past few years and if you look at the balance sheets of the companies today versus pre-crisis, they’re not the same. Yes, earnings are much better, but the balance sheets are cleaner and stronger. Yes, price-to-earnings ratios might look expensive, but on a company basis, it is still appealing. The dividend yields are amazing.
The dynamics are different because you don’t have a lot of stocks you can trade, and these stocks are mainly in the real estate sector, the banks and so on. But we’ve seen also the small and mid caps rally this year and they’re starting to attract more and more local investors. A few years ago, nobody was touching them, but things are improving.
Jon Titone, NBAD: We’ve seen significant interest from our long term, buy-in institutional investors in securities lending and borrowing. We see the potential to unlock the value in their dormant holdings, and increase the liquidity and price transparency in those equities that aren’t actively traded.
Funds Global: Which equity sectors are most attractive in the UAE and in the wider MENA region at the moment? What is your economic forecast for the region in 2014?
El Adou: In the UAE the more interesting sectors are yet to be listed, which are the retail, consumer and tourism sectors, in addition to the construction sector and banking. Unfortunately, we have seen some UAE-based companies choose to list elsewhere, such as the London Stock Exchange, and the lack of clarity over the companies’ law may be the cause of this.
Mohindra: The consumer sector in Saudi Arabia is interesting. Saudi Arabia is a country with about 28 million people, 60% of them below 30. In the UAE the traditional strengths of the economy are trade, tourism and logistics. Yes, there are limited options to play there, but there are a few listed entities and some of the banks where you can play this theme. I’m a big fan of the energy advantage of the region and, therefore, from a medium- to long-term perspective, petrochemicals are something which will drive growth.
Watts: We are in an environment where you are going to see a lot of growth and yes, in a rising interest rate environment you’d expect some of the banks to benefit. Again, infrastructure growth is going to support real estate so not a huge problem there, but again it’s all stock specific. We also like the consumer play in Saudi Arabia.
We’ve got to bear in mind that, where information isn’t fully available and acted on almost instantaneously, research is definitely king. In the US, if any of the S&P 500 stocks comes out with a new piece of information, it is immediately pored over by hundreds of analysts and reflected in the price. You come to this region and get some real information asymmetries.
Funds Global: The Abu Dhabi Global Market has begun making senior appointments. Are you involved in the development of this free zone and what are its goals?
Watts: Abu Dhabi is trying to bring in another level of financial services excellence and another dimension to Abu Dhabi. You’ve got this in many other countries. You’ve got it in Dubai. There’s no reason why Abu Dhabi shouldn’t have that.
The challenge for Abu Dhabi is to give itself a proposition which differentiates itself from the other offerings around the region. That is still a work in progress. It doesn’t do anybody any good to have an Abu Dhabi entity and another one at the other end of the Sheikh Zayed Road that basically do the same thing. Now, everybody knows that. Over the years, you’ve seen a large amount of cooperation between Abu Dhabi and Dubai. So there’s every chance that the new free zone will be additive to the UAE.
Mohindra: This is a clear move towards diversification away from oil and there is room for both financial centres. Just because you’re 100 kilometres apart doesn’t necessarily mean you can’t have another financial centre in the country. It will attract a different set of people and a new sub-segment of the industry. If you have more financial services professionals working in the UAE they will drive demand for a lot of the other sectors, such as healthcare, real estate, education, retail and leisure, and that’s positive in the long term.
El Adou: Abu Dhabi’s advantage is the sovereign wealth funds, which should play an instrumental role in expanding this global platform. It’s going to take time which is evident when compared to the time taken by regional hubs, such as Bahrain, and the DIFC [Dubai International Financial Centre], to develop their foothold.
Other international hubs, such as Singapore and Hong Kong, were able to succeed over time. We are bullish about it if it’s done properly. The main point is, how do you attract the financial advisers, wealth managers, fund managers and so on. How would you incentivise them to open in Abu Dhabi rather than open in, say, Hong Kong?
Kheirallah: The sovereign wealth funds are here, the family offices, and having a local presence is important to these people. At Falcon, we also have an office in Dubai, but it’s important for us to say, hey, we have an office here on the Corniche Road. If it’s done properly in terms of regulations, rules and laws – and we have seen a lot of international companies and law firms and consulting firms and financial institutions moving there – then yes, there can definitely be another financial hub here based in Abu Dhabi.
Titone: Everything Abu Dhabi has done to execute the 2030 vision has been done well. It’s a 22-year plan that’s under way and it’s six years in progress. We’re seeing a massive push toward economic diversification and with what they’ve done thus far you have to believe that they’re going to do it right and they’re going to find the strategic differentiators to make it attractive. We’re seeing the partnerships here with education, healthcare, and all of the recent aviation contracts. There will be clear differentiators, competition, but also cooperation between DIFC and Abu Dhabi.
Funds Global: Is it easier to get access to the sovereign wealth funds and state pension funds of Abu Dhabi if you are based here in Abu Dhabi?
Kheirallah: Yes and no. It’s easier when you’re here because you can see them at any time. But these investors are very sophisticated, they’re not going to deal with everybody. They have their mandates, strategies and focus and they know what they want. For us it makes more sense to focus on family offices, which are easier to access and need our services.
When it comes to private banking, there is a cultural aspect to consider too. A lot of high-net-worth individuals still like to do private banking with somebody who’s based in Geneva. They like to be able to say their private banker is flying over from Geneva even though they could get the same service from a company based here.
Titone: We’re dealing with the most sophisticated parties in the world here. They can buy the best service the world has to offer, so a local player has to offer them that. You have to be on par with the others at a competitive price. If you can do that, there could be an advantage to being here in Abu Dhabi if you could show alignment with their goals, with their vision. But you have to have the best service and the best products tailored to their needs.
Watts: When you take the sovereign wealth funds in this region, one size does not fit all. There are some entities who have a long history and a well developed investment process and some which are at the start of that journey. We find our role varies from that of pure investment manager to a more consultative role.
The sovereign wealth funds are definitely not the only game in town. That statement tends to come from international players – the suitcase salesmen who fly in for two days and want the most bang for their buck. They go down the list in terms AUMs because an hour meeting with somebody with $60 billion is better than an hour meeting with somebody with $6 million. It’s as simple as that.
If you look at our overall business today, about half our business is mutual fund driven and typically the buyers there are individuals. The other half is institutional. That includes some sovereign money but also you have lots of corporate money and insurance money. Sovereign wealth funds are important like any professional client is important, but by no means are they the only source of assets.
Mohindra: Some of the sovereign funds are not mandated to invest in the region because they were set up to diversify away from the region. So, for the regional investor, they are not the only game in town.
Sovereign funds that do invest in the region will look at performance, people and processes while evaluating a manager. We need to be among the top performers consistently to show them that we can do the region effectively and have the right product for them to invest in. In the long run we see a lot of opportunities locally/regionally from retail, corporates, pension funds and insurance companies.
Is there an advantage of being here? Yes. If you are on the ground you do get access to some of these sovereigns. If I do a like-for-like comparison and compare Invest AD with a similar-sized fund manager somewhere else, there’s an advantage of being here. We have better access to local sovereign funds and pension funds and that’s an advantage we can leverage off.
Funds Global: Are there advantages to being based in Abu Dhabi compared to, say, Dubai, Bahrain or Doha?
El Adou: Bahrain was the first financial centre in the region but they have had political problems and many of the international banks have retrenched. Qatar is trying to do a model to attract for asset managers but it is still hard to see any traction. Dubai on the other hand has the DIFC and, since the Arab spring, its stability has made it a stronger case for many of the regional players and international institutions.
Definitely, Abu Dhabi will have something to offer. The main advantage is wealth coming from sovereign wealth funds and family offices, which Abu Dhabi can take full advantage of. In addition, being closer to those major entities would help international companies build stronger ties.
Watts: It depends on the type of business you’re doing and the type of knowledge cluster you’re after. Let’s look at the US – New York versus Boston. New York has grown up to be the investment banking and capital markets powerhouse of North America, but, interestingly, Boston has become the asset management powerhouse. You go down to South Africa, Johannesburg is the banking capital, but Cape Town is the asset management capital. You get that kind of that mix in a lot of countries. You could say that London is capital markets, but if you go up to Edinburgh you find quite a few large asset managers, far more asset managers than you would expect.
Now, to put that in a UAE perspective, Dubai looks like a capital markets centre. Where have Deutsche Bank and Standard Chartered chosen to set up?
They’ve chosen to set up in Dubai because there is the knowledge cluster they want – this includes trained staff, legal support, accountancy support, consultancy support.
All of that has created its own critical mass. It’s very difficult for that to shift. However, what we’ll probably see is Abu Dhabi making great strides on the asset management front while Dubai cements itself as the capital market centre of the region.
Kheirallah: If an international company wants to come and set up business here, the first place that would come to their mind in the region would be the UAE, Dubai or Abu Dhabi. Even if they come without their family, they want a liveable place and for them it’s not going to be Saudi Arabia, it’s not going to be Kuwait. Today, Bahrain is less popular because of the political situation being less stable.
Funds Global: What are the latest developments in your dialogue with Securities and Commodities Association (SCA) over fund regulations? Are you optimistic that progress is being made?
Mohindra: In February they released an official gazette of the investment management regulations that were announced in 2012. It is still early days to comment on specific rules, people are still studying these and trying to ascertain the ramifications and how those things are being implemented. The SCA themselves are looking for feedback.
There are a few interesting and very encouraging things in the regulation. One is the huge emphasis on investor protection, which is a positive for the development of the capital market. That was one of the problems in the UAE and the region. I’ve been in the region for 11 years and in the up cycle I’ve seen a number of unscrupulous wealth managers take money from investors and just vanish.
Now, the regulator is talking about independent custody, fund admin, minimum capital for asset managers, and that’s good progress. There are some queries that we have on the fund management side, in terms of how to set up, where to set up, and who can market to whom, given that we have this mix of onshore and offshore funds. That is an area where there are still some queries, but on the investor protection side they’ve made good progress.
El Adou: The SCA have been very swift when it comes to responding to enquiries from asset management firms. There has been a lot of progress on the fund regulation side. But these regulations need time until they mature as evident in the developed markets. Fund regulation is an ongoing process and it is continuously reviewed and upgraded to meet the dynamic environment of the financial industry.
Titone: The SCA has an open door policy. They’re consultative with us. We’ve been working closely on market-making implementation and securities lending and borrowing, offering our candid feedback. They are taking it constructively, and we are seeing strong progress toward the finalisation of the operating models and our roles and responsibilities. There is still a bit of work needed.
There are still areas in the fund regulations that need clarification. We were talking about the activities and what is permissible in the free zones versus onshore.
The fund law last year gave a bit of clarity there, but there’s still a way to go. I’d also suggest the fund law needs to add the classification of institutional investor to allow these investors to participate in the structures and products they choose.
By adding this classification, the market can protect retail investors with the stronger regulations they have rightly introduced, but allow sophisticated investors more options.
Watts: It sounds odd as a market practitioner but I’m a big fan of regulation. Over-regulation, no, but regulation, yes, because at its basic level, regulation means investor protection.
If you get your regulation correct that means you’re getting your investment protection correct and there will be a lot of confidence, transparency and trust in the market.
In my four years here, we’ve seen a big change in the SCA. I recognise what the SCA is doing is up there with some of the best international standards.
Now, like any regulator, they follow a process of open consultation beforehand, then the rules come out. The regulator seems open enough to recognise where the rule book may push people to do something they haven’t intended and then they go back and amend the rule book. That happens everywhere. Remember that the global gold standard of mutual fund regulation is Ucits and they’re now working on Ucits V!
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