JEDDAH – Asset managers of all stripes were generally positive about 2013, believing that GCC markets, in particular, which have recently lagged behind their global peers, look attractive at current levels of valuation, the first edition of Qatar Financial Centre Authority's MENA Asset Management Barometer launched in Doha Monday showed. Trading at a 6 percent discount to other emerging markets, GCC equities were predicted to enjoy a period of growth in 2013 and, according to the barometer, are set to return between 10 and 15 percent with Saudi Arabia, Qatar and the UAE poised to out-pace the rest of the region.
Saudi Arabia, Qatar and the UAE remain particularly attractive from a valuations perspective, with banking and petrochemicals across all three – both underleveraged and offering high dividends – seen as the stocks likely to do well in 2013. The sound economic fundamentals of the GCC will help it to consolidate the safe-haven status it acquired through the political dislocation created by the Arab Spring. According to Barometer respondents it has done particularly well from wider MENA investment, with 85 percent of regional managers, citing inflows from MENA countries outside the GCC. Participants in an Invesco study believed that the wider-MENA capital flowing into the GCC – with a bias toward Saudi, UAE and Qatar, was driven by the factors in Fig 6. This flow of wider-MENA capital into the GCC, which has mostly found a home in money market funds, is expected by Barometer respondents to continue in the short to medium term, with many expecting these ‘safe' inflows to take on a more ‘risk-on' guise as investors “latch on to a new economic cycle” and show an appetite for “moving up the yield curve” and “taking on more risk”. Managers responded positively to this trend of de-risking - seeing it as an opportunity to improve liquidity and inject fresh money into the market - and are planning to launch a batch of new equity, fixed income, Shariah-compliant and property strategies in 2013 to meet demand. Although keen to make the most of the attraction of this safe haven status, managers are concerned that the benefits of political stability could be short term, with a reversal in flows once the political situation elsewhere in MENA begins to ease. Many of the recent inflows are still held in money market funds – the traditional home for short-term investments. This means that the flow of capital to the GCC may slow over time, although economically attractive centers like Qatar, UAE and Saudi are expected to maintain momentum. Key differences in the GCC and harmonization Despite the structural unifier of the GCC, there remains a series of important differentiators between the economies that make up this union. The asset management firms that reported to the Barometer described UAE, Saudi Arabia and Qatar as all poised to experience consistent growth in 2013. While Kuwait and Bahrain were all tipped to emerge more slowly. Managers – who were still fully expectant of inflows stemming from the wider-MENA region, as well as global investors – also described the flow of capital between GCC principals as stilted, despite the economic partnership. A handful of regional banks and distribution platforms sit outside this prevailing trend - HSBC, Citi, and Bank of America Merrill Lynch all have successful cross-border distribution networks and have been the true beneficiaries of the recent political uncertainty, because they are seen as safe havens from domestic strife. However, even relatively large regional players, like NCB Capital (NCB) and the National Bank of Kuwait (NBK), still derive the bulk of investment from a local base. Similarly, a number of sovereign wealth funds (SWFs) have slowed GCC-wide investment, in favour of more domestic infrastructure projects. Although this strategy remains heavily dependent on the political status of each SWF's home state, and is likely to reverse overtime, it has also been responsible for a slowing of cross-border GCC flows. Many independent and bank-owned fund managers who took part in the Barometer saw crossborder distribution in the GCC as key to their future development, albeit a trend that will develop slowly. Barometer respondents said that a network of independent fund managers – many based in the UAE and Qatar – are best placed for the GCC and wider-MENA's cross-border distribution opportunities. A number of large regional banks, with asset management units, expressed admiration for the fleet footed independents in the Qatar Financial Centre (QFC) and Dubai International Financial Centre (DIFC) and a “business model that is predicated on independence and cross-border opportunities”. Bank-owned asset managers tend to have localized relationships because of historical ties and localized sales forces. Independent managers – a hedge fund or a small long only fund – with nimble marketing teams are more capable of fostering cross-regional appeal. However, many still struggle to diversify because of regulatory impasse and because, realistically, they are only competing for 2-3 percent of local money that will leave its home GCC state. For example, a large Saudi-based firm, like Samba, will easily have $3-4 billion in equities, based on its local retail relationships. A small independent manager will have $50-150 million per fund based on cross-border selling, while a handful of genuine multinationals – like HSBC – are able to sell product at scale across the region. Despite the challenges, the Barometer found that a number of GCC managers were eager to capitalize on cross-border distribution potential by setting up secondary and tertiary GCC offices in 2013. The UAE, Saudi Arabia and Qatar remained the most popular venues, while globally Singapore was considered a top location for a new marketing hub, particularly with those offering Shariah-compliant vehicles. The long-term future of intra-GCC flows are difficult to define, according to Barometer respondents, although most saw asset flows between GCC states as a growing trend. However, others pointed out that despite being designed as a free trade bloc, cross-border investment on both the retail side and institutional side is still comparatively low. These tensions mean it is more likely in the short term that GCC assets will flow outside of the region – an issue that local asset managers need to overcome. There are a number of distribution opportunities for fund managers. The UAE's emerging independent financial advisor network was seen as a strong and influential presence – particularly among the expat investor community. Managers responding to the Barometer said that GCC-based financial advisors were also adding to an atmosphere of increasing risk tolerance and were capable of driving more investment into the equity product of managers. This emerging advisory network was expected to become the norm in a number of GCC hubs and would, according to Barometer respondents, follow a developmental life-cycle that would see them move from the expat market to more local advisory work – particularly if a regional private pensions industry takes off. The report cited key emerging opportunities in the GCC, among them: * Signs of resurgent stock market performance. Managers expected a level of growth capable of significantly boosting the GCC's combined market cap of $750 billion and broadening local equity markets * A larger fixed income market, expected to grow in size and diversity as more regular debt issuances – public and private – come to market in 2013 and 2014 * A stable and competitive banking system – well capitalized, highly liquid and with supportive shareholders * Safe-haven status of the GCC and its likely long-term stability, particularly compared to the rest of MENA * A growing local familiarity with investment products and better distribution of these products 6. Revived property markets, particularly in the UAE * Islamic products driving more local, regional and global investment flows. * Large state surpluses and increased state spending * A growth in oil production and the potential for higher oil prices * Gradually improving regulation and the portability of using the GCC as an asset management hub
* The return to a ‘risk-on' environment with more activity from both local investors and global allocators, who are showing an increased interest in frontier markets, particularly equities
* The development of a fully diversified institutional investor base, including a local private pension funds industry and existing state pensions that are becoming willing to engage with local markets. Institutional investors, according to Barometer respondents, were also encouraged to participate in GCC markets by the ongoing growth of financial center venues, like the Qatar Financial Centre (QFC) and the Dubai International Financial Centre (DIFC). These centers continue to nurture the creation of a domestic fund management market and have also provided a key location for custodial and fund administration services. – SG
