The 2011 Middle East Fund Survey has revealed that despite the challenges facing the sector, there are plenty of new opportunities for growth this year
The UK’s Advent Software sponsored the 2011 Middle East Fund Survey. The survey respondents included 111 investors, 25 fund companies and 34 fund distributors. The majority of respondents were based in the GCC states and had at least 50 employees.
Most investors, fund companies and distributors in the Middle East are optimistic about the prospects for business growth and development this year, according to a survey conducted by MEED Insight and the UK’s Advent Software in mid-March.
Some 62 per cent of respondents indicated plans to hire new staff in 2011, several specifying as many as 10 employees. Meanwhile, 52 per cent of participants said they expected business to be better this year, compared with 2010. This means even companies that do not expect to grow this year will be hiring new staff in anticipation of improved business opportunities beyond the next seven months.
The findings contrast strongly with the reactionary stance taken in response to the economic crisis of 2008-09, during which one-third of those polled said staff numbers had been reduced.
Generally, the business activities of the companies that indicated a positive outlook are focused in Abu Dhabi, Qatar, Kuwait and Saudi Arabia. A projected construction boom in Qatar and Saudi Arabia is expected to keep regional markets buoyant. The upbeat prognosis is also shared by companies that have diversified their investments to include global and emerging markets.
Another factor fuelling respondents’ overall positive outlook is the growing anticipation of a shift in the predominantly parochial attitude among many Middle East investors and increased engagement by the region’s traditionally elusive institutional investors.
On the other hand, companies operating in countries such as Bahrain and Egypt are more cautious about their prospects for 2011.
“With demand and productivity slowing down significantly, and the movement of goods severely interrupted following the revolution, we can’t afford to be optimistic,” says a financial analyst at an Egypt-based fund company.
“Restoring investor confidence is a primary issue that the region will have to deal with for the rest of the year”
A Bahrain-based investor says: “Even if the fundamentals [in the Middle East and North Africa (Mena)] improve this year, it will take time to improve market confidence now that it has been shaken. Restoring investor confidence is a primary issue that the Middle East region will have to deal with for the rest of the year.”
Respondents say delays in the launch of new funds, poor stock market performance and changes in regulations in some countries could further exacerbate the market’s vulnerability.
It is important to note that the region’s stock markets made a remarkable rebound within a month of this survey. The Abu Dhabi-based Arab Monetary Fund reported that the combined market capitalisation of Arab stock markets rose by $13bn from 17 March to 17 April, reaching $954.5bn. This was on the back of massive losses earlier, particularly related to the protests in Bahrain. The recovery demonstrates the regional exchanges’ flexibility in responding to positive developments, among them the multi-billion dollar government spending packages announced by Saudi Arabia’s King Abdullah. But it should also be noted that the overall gains are, for the most part, attributed to the bourses in Saudi Arabia and Qatar. The stock markets in Egypt and Morocco still continue to sustain losses.
Although there is a readiness within the fund industry to hire new staff, a lack of experienced finance professionals within the region was highlighted as a major challenge facing the sector. This has led investors, fund companies and distributors to hire mostly Western finance professionals to fill key executive positions in the past - a trend that will likely continue in the future. The shortage of expert finance professionals is partly responsible for the slow compliance with regulatory reforms and sluggish implementation of risk management and controls in some companies. It is an area that has received increasing attention since the economic crisis began.
“Fund distributors are hopeful that institutional investors will have a more actively managed portfolio”
About 31 per cent of those polled indicated that the regulatory framework in the countries in which they operate is insufficient. Respondents said that establishing an independent court similar to the Dubai Financial Services Authority, which provides legal redress in civil and commercial matters involving fund industry players, is needed. It is widely perceived that the absence of similar frameworks has kept some international players from entering certain markets in the region.
Despite the challenges confronting the Mena region’s fund industry, real opportunities await market players. Fund distributors are hopeful that institutional investors, such as insurance companies, will have a more actively managed portfolio in the future. They are also expecting asset managers and mutual fund companies to become more engaged in local markets.
New products expected to drive future growth include Islamic insurance (Takaful). “There is a huge insurance market in the Arab world and we have barely scratched the surface,” says a spokesperson from an Abu Dhabi-based fund company.
Moreover, new markets could include the emerging, less risky markets, such as those in Africa, according to an Egyptian fund company: “There is a really interesting story on these underdeveloped, but rapidly growing, countries in Africa that will attract investors.”
Ever wary about returns, especially in difficult business environments, the investors who participated in the survey indicated which asset classes they will likely favour in 2011. Long-only equity and fixed-income products in emerging markets, along with property, emerged as the top three asset types. A quarter of respondents also indicated that they plan making most of their new investments in sharia-compliant hedge funds.
The real-estate crash in the UAE, particularly in Dubai, has not diminished investor interest in real-estate assets elsewhere. “In the bigger scheme of things, the Dubai property market is just a small slice of the pie,” says one fund company spokesperson. “The property market will remain attractive for the rest of Mena and globally.”
The survey found that 50 per cent of fund companies still see retail clients as offering the most opportunities in 2011. However, more than a third favoured institutional clients, while 13.6 per cent specified wholesale clients.
Finally, about 35 per cent of fund companies and distributors said the equities market in the GCC will offer better opportunities in 2011. An overwhelming 86 per cent of them indicated that they expect increased inflows into the market in 2011, regardless of the widespread geo-political turmoil.
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