Asset management in the GCC - Euromoney

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A compelling opportunityfor asset managersOil prices at $100 a barrel and more are not the only thing generating excitement about theprospects for the GCC economies. Non-oil GDP is also increasing and there’s a young populationwith increasingly sophisticated investment requirements. Chris Wright reportsThe Gulf represents one of the most exciting opportunities for assetmanagement anywhere in the world. At a time when global markets arebeing rocked by credit problems and an uncertain economic outlook,the Gulf Cooperation Council (GCC) presents a compelling range ofdrivers: growing wealth, at a sovereign and individual level, fuelled by arecord oil price; growing sophistication in investment; liberalizing regulatoryenvironments across the region; and stock markets that show littlecorrelation to global equities.At the heart of the Gulf’s appeal is its strengthening economic position,and it sets a framework for the growth of a vibrant asset managementindustry. National income growth averaged 19% in the six GCC nations(Saudi Arabia, Kuwait, Qatar, the United Arab Emirates, Bahrain andOman) in the four years to June 2007; over the same period, GCC governmentsadded $500 billion to their net foreign assets despite huge spendingon projects. In the Middle East generally, GDP doubled between 2002and 2007, and is projected by Morgan Stanley to reach $1.045 trillion in2008, representing a compound annual growth rate of 16%; and withinthat, the GCC is not only by far the biggest chunk (Saudi Arabia is 37%of regional GDP) but is growing in influence – Qatar, Kuwait and the UAEraised their share of regional GDP collectively from 27.5% in 2002 to35.4% in 2007, according to Morgan Stanley.Additionally, the Gulf is one of those rare parts of the world where theage dependency ratio is declining: it’s a young region, with its populationentering a demographic sweet spot, and more and more people ofa working age.In large part, it’s all about oil. The Middle East provides 62% of global oilreserves and 31% of global production, according to Deutsche Bank;the GCC alone was already generating a current account surplus of over30% of GDP in 2007, and that’s before oil topped US$100 per barrel.According to the National Bank of Kuwait, GCC hydrocarbon exportrevenues climbed 47% in 2005 and another 20% in 2006, reaching $360billion in the last of those years, and that, again, is based on a far lower oilprice than today. A cross section of analysts and the IIF suggests that thebreak-even prices for oil producing countries are between $25 and $42per barrel in the various GCC countries – and ‘break-even’ simply meansthe revenue required to balance the budget. Analysts say that governmentspending is generally based on the assumption of $50 a barrel.“At $51, you’re putting another dollar into the sovereign wealth fund forevery barrel of oil,” says Daniel Smaller, managing director for sales anddistribution at Algebra Capita, an independent fund manager in Dubai.“So at $110...”According to data from the IMF and HSBC, every $1 increase in the oilprice, sustained for one month, means an additional $500 million ofrevenues for GCC producers. If one considers the difference between oilat $60 a barrel, and at $80 per barrel, it equates to a GCC economy $200billion bigger, or 25%; a fiscal surplus $100 billion bigger, or 90%; and acurrent account surplus $100 billion bigger, or 70%. “If oil dropped to$50, the economy would continue to grow at a very healthy rate,” saysTarek Sakka, CEO of Ajeej Capital, a recently formed independent fundmanager in Riyadh, referring to Saudi Arabia; at double that level, thewealth effect is immense.Consequently, governments have been able to pledge huge amounts forcapital expenditure in the region – commonly cited figures, if somewhatvaguely sourced, are $500 million in the next two years, and $2 trillionin the next 10. And it’s not just oil that is providing such a boost. Non-oilGDP is rising too. To take Kuwait as an example, NBK says that financialservices, transport and storage, communications, construction andmanufacturing have all achieved double-digit growth for three years“The Gulf ... is a young region, with its population entering a demographicsweet spot, and more and more people of a working age”in a row. And in Saudi Arabia, Brad Bourland, chief economist at JadwaInvestments, forecasts the non-oil segment of the Saudi economy togrow at between 7 and 8% through 2010. “The boom continues to buildand spread to the private sector,” he says. “From what it originated as– an oil price-driven boom, which means government revenues andmega projects – it is now spreading to more non-oil, with private sectorenthusiasm across the board. The outlook’s very bright.”GUIDE TO ASSET MANAGEMENT IN THE GCC
All told, the IMF’s World Economic Outlook predicts 5.9% growth for theMiddle East in 2009, and in some nations, notably Qatar and the UAE,analysts sometimes print double-digit expectations for near-term GDPgrowth. Perhaps best of all, the Gulf is not at all reliant on the US consumer,hence its decorrelation with world markets. “Look at the numberof bullish reasons to invest in the Middle East,” says Smaller. “There’s highgrowth. In an inflationary environment you want to be in markets with alarge attraction to fixed assets, infrastructure, oil and real estate – so theMiddle East. There’s an undervalued currency; negative real interest rates,pushing people to invest rather than leave their money in the bank; marketmultiples below those of other emerging markets but with highergrowth; index changes happening; and the fact that it’s not tied to theUS consumer. The list goes on.”So how does all this translate into an opportunity in asset management?In several ways. This increasing wealth is most clearly demonstratedamong the region’s vast sovereign wealth funds. None of the Gulf’sSWFs disclose assets under management but they are believed betweenthem to have over $1.5 trillion under management, with the Abu DhabiInvestment Authority alone believed to have as much as $875 billionunder management, growing by the day. As the next chapter discussesin more detail, these funds are increasingly sophisticated, and committedto the diversification of their wealth outside their home market. That haspresented a huge opportunity for international investment managers.Additionally, growing prosperity in the Gulf has led to a growing massaffluent and retail investor base and also an increasing number of highnet-worthindividuals. These, too, are growing in sophistication, and it isoften suggested that the widespread stock market falls of 2006 helpedto promote in people’s minds the value of professional management,aiding the fund management industry in reaching out to this client base.Increasingly, individuals in the Gulf are being encouraged, or obliged,to save. State-run pension funds exist in most GCC states, along varyingmodels but generally taking a mandatory chunk of income and saving it,often with an additional contribution from Mutual the fund state AUM itself. in the Private region sector2007 estimatespension funds are in their infancy but industry professionals expectthem to emerge as a force, increasing the pool of institutional wealthto be invested, and again creating an opportunity for well-placed assetmanagers, both local and international.This shift is generally what has the most dramatic impact on investmentmanagement industries: the institutionalisation of individual long-termsavings. Consider Australia. It has just over 20 million people yet has bysome measurements the third largest asset management industry in theworld, with A$1.17 trillion under management in superannuation funds(pension funds) at the end of 2007. This has happened because of thedecision in the 1990s to compel retirement savings in tax-advantagedfunds by individuals. The rest is just the effect of compounding and time.As Gulf states move towards greater mandatory savings and a more sophisticatedpension fund system, the investment management industryshould grow accordingly.The growth of markets themselves also helps. Most GCC stock marketsare young; Qatar’s was launched in 1997, and the UAE’s, in their currentform (there are two stock markets in the UAE plus a more recentinternational exchange), in 2000. Most also have few listed securities bydeveloped market standards, with trading dominated by a handful ofbigger names. However, the pipeline for new issuance is considerable.SHUAA Asset Management, a Dubai-based fund manager, has estimatedthat even if GCC stock markets themselves did not move an inch in thenext few years, their market capitalization would double because of theweight of expected IPOs. Stock market valuations are also low by worldstandards, attracting more investment.That sort of momentum attracts international attention. And as Gulfeconomies and stock markets grow, it becomes more and more likelythat they will be included in key international benchmarks such as theMSCI Emerging Market Index. The latest thinking is believed to be thatMSCI plans to upgrade Taiwan, Israel and South Korea to its developedmarkets index, and to replace them with Kuwait, the United Arab Emiratesand Qatar (a firm announcement on this is expected in June, andany new inclusion would probably be preceded by a full year’s notice).That would require investors who track the index to gain exposure tothose markets quickly, vastly increasing the participation of foreignmoney in local markets and very probably the opportunities for localMutual fund AUM in the region 2007 estimates252015$bln1050Saudi Arabia Kuwait Egypt Bahrain UAE Qatar OmanSource: Saudi Arabian Monetary Agency, Central Bank of Kuwait, Central Bank of Bahrain, Cerulli Associates
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Asset management in the GCC - Euromoney

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