JEDDAH – The regional fund industry is showing greater optimism and confidence in 2012 compared with 2011, Advent Software, Inc. said in its white paper titled “Middle East Fund Survey 2012”. It noted that the trust is driven by factors ranging from better expectations in individual company performance to better opportunities in the GCC markets – from improved market sentiment regarding the UAE property market to overall expectations of net inflows into the industry. The survey also “clearly validated the strength of the Saudi Arabia, Qatari and UAE markets in terms of liquidity and size.” The volume and size of project activity in Saudi Arabia, UAE and Qatar also make them very lucrative for both local and international fund companies and distributors as well as for investors. While underdevelopment of the market is a concern, it conversely highlights room for growth, should the necessary regulatory framework and subsequent compliance mechanisms be implemented. Population growth rates and reconstruction efforts across the MENA region following the end of the uprising in many states are indicative of high latent demand for infrastructure and power. The expected rise in project activity across the region can only be sustained with adequate financing in place. In terms of the opportunities offered by each GCC state, the top three rankings have reshuffled in the 2012 survey with Saudi Arabia gaining the top rank, and Qatar slipping to third. The bottom three (Kuwait, Oman and Bahrain) country rankings have remained unchanged. There appears to be a clear division between Saudi Arabia, UAE and Qatar, the leading GCC states and the remaining three, not just in terms of the final score, but from opinions in the market as well. With the upcoming World Cup in 2022, increased demand in Saudi Arabia for housing, infrastructure and power, and the rise in project activity in Abu Dhabi, these three countries appear to be the most promising in terms of potential investment opportunities. A gradual return of confidence in the UAE market further explains the rise in its overall score. A London-based banker, active in the regional project finance market, explained that the perception of risk in Saudi Arabia, UAE and Qatar is much lower than in Bahrain, Oman and Kuwait. “The sheer size of the Saudi market makes it an attractive option,” he emphasised. Other respondents also attest to the strength of the Saudi Arabia fund industry, in terms of depth and liquidity, and the impact of the government expenditure trickling down to the stock market. Close to 50 per cent of the respondents believe that the opportunities available in the GCC equities market are better in 2012 than in 2011. The fund companies showed the greatest optimism, with close to a quarter of the respondents expecting better opportunities. A very small percentage expects the equities market in the region to provide fewer opportunities, substantiating further the idea of a recovery in market sentiment. Investors in the region continue to prioritise property investments in spite of the high-profile UAE property crash, and fund companies and distributors continue to expect net inflows into this asset class. This could tie in with the preceding analysis where the majority of the respondents said that the property market has bottomed out. Distributors of funds are looking towards introduction of new products in the market and penetration into new markets as primary drivers of growth for their firms. An equal number of distributors identified these as the top means for achieving growth. Moreover, distributors are looking for access to a wider pool of investors to drive growth in 2012 and new client segments to sell to. The bottom line across all the selected growth drivers is diversification, used as a means to hedge risk in the event that existing markets fail to recover. Fund companies, while indicating a reliance on flows from existing clients to existing products, highlighted “new products” as the top growth driver for 2012. For both distributors and fund companies, this spells greater competition in the fund industry. In addition, an Abu Dhabi-based capital firm also cited the need to reassure investors of the MENA fund business model as an essential driver of growth in the fund industry. On the macroeconomic level, the respondents indicated that a return to robust economic growth, in major developed and emerging markets will most likely play an important role in their long-term success. Many of the long term operational factors that are perceived to ensure the respondents' success were similar to those provided by respondents last year, including outsourcing, human capital acquisition and cost reduction. The report further said that while the existing regulatory framework governing the fund industry in the MENA region is generally weak, the recent policy and regulatory changes in some states are expected to ensure a higher level of transparency and therefore encourage market growth. A unique long-term trend identified by a UK-based Arab bank is the development of a project finance bond market. – SG
