Winter 2015

ASSET MANAGER PANEL: Growth prospects

Experts from among the top asset management firms in the Gulf region discuss their economic forecasts in an environment of low oil prices. GARY DUGAN, CHIEF INVESTMENT OFFICER, GLOBAL WEALTH, NATIONAL BANK OF ABU DHABI (NBAD) What is your outlook for the economies of the GCC in the next one to two years?
The next two years will be challenging for the GCC region. The fall in the oil price has been severely disruptive to government plans, requiring a reining in projected spending and the exploring of previous taboos such as tax increases.  To be fair, the impact on regional growth so far has not been remarkable. Indeed the IMF’s downgraded forecast for GCC growth has been similar to cuts in global GDP forecasts. The impact of the fall in the oil price and its negative impact on GCC growth has, and will be in the future, offset by growth in the non-oil sector.  We believe the outlook for the next two years will depend heavily on how each country deals with the loss of government revenues from oil. If governments solely use tax increases to fill the revenue gap, then growth is likely to be severely hurt. If, however, they were to use the opportunity to maintain a commitment to infrastructure spending while making government more efficient and able to maintain services without a serious increase in the burden of service fees and taxes, then we believe growth in the region could even surprise to the upside. ARE YOU CONCERNED THAT THE LOW OIL PRICE WILL AFFECT YOUR BUSINESS?
The low oil price is for sure going to reduce the potential growth of the wealth industry. However, wealth will still grow. Even with the downgrades to GDP forecasts, nominal growth could still be running at a level of over 5% a year for the next two to three years. Assets under management are expected to continue to grow at a healthy rate. What asset classes and investment products do you expect will attract demand from Middle East-focused investors in the year ahead?
We expect Middle Eastern clients to look increasingly to the global markets for investment opportunities. We have seen a trend for clients to invest more heavily in overseas bond markets. In recent weeks there have been more enquiries about emerging market debt. TARIQ BIN HENDI CHIEF EXECUTIVE, EMIRATES NBD ASSET MANAGEMENT What is your outlook for the economies of the GCC in the next one to two years?
We remain optimistic in terms of the prospects for the region. The GCC region benefits from a positive demographic distribution as compared to more developed regions such as Europe and North America. Whereas those economies suffer from a lack of youth, and a population imbalance skewed towards the more mature age set, the GCC has a large youth population that is joining the workforce and bringing new ideas to local and international institutions. This, along with continued government spending, positive changes in legislation and the expansion of industries and sectors beyond oil, all bodes well for GCC economies. There may be some short-term strain on budgets, but medium to long-term views are positive. We expect GDP growth within the GCC to average 3%, supported by non-oil GDP growth. Having said that, we do expect some restructuring in regional economies, namely in the reduction or removal of energy subsidies (UAE is leading the way in this), a gradual introduction of VAT, and the postponement of non-critical investment plans. This brings discipline to fiscal budgets, with any deficits during this period of adjustment easily met with existing financial resources. GCC countries are some of the least indebted in the world and there is ample capacity to borrow if required. Are you concerned that the low oil price will affect your business?
Over the longer term, no. On a positive note, low oil prices will have significant implications for future oil supply. Many international oil companies have slashed their capital expenditure budgets. At the same time, oil demand is growing by about 1.5mbpd (million barrels per day) each year. Taking into account natural depletion of existing fields, stagnant or declining future supply growth due to cuts in investments, and rising oil demand, we could be in a situation where not only will oil supply-and-demand dynamics converge rapidly post-2016, but they could reach a tight supply situation sooner than later, resulting in elevated oil prices back to the $80-$100 range.  OPEC forecasts that by 2020, oil prices could reach $80 per barrel but this could prove to be conservative if supply continues to be curtailed due to current low oil prices. In such a scenario, GCC economies could find themselves in a fortuitous position where budgetary discipline results in lower break-even oil prices while oil prices rise beyond these levels due to future supply constraints, resulting in a restoration of reserve accumulation through budget surpluses. What asset classes and investment products do you expect will attract demand from Middle East-focused investors in the year ahead?
Regional investors continue to maintain their investment themes of diversification. This diversification is sometimes geographic, but predominantly asset class and sector-based. Large institutions and institutional family offices continue to expand their investments in the region and this is helping to drive growth across the GCC, but particularly in the UAE and Saudi Arabia. These investors are looking to diversify into more non-traditional and illiquid products and are becoming more comfortable with longer investment tenures to capture higher returns over a longer period of time. They also continue to invest in traditional and familiar asset classes including real estate, equities and fixed income. AKBER KHAN, SENIOR DIRECTOR, ASSET MANAGEMENT, AL RAYAN INVESTMENT What is your outlook for the economies of the GCC in the next one to two years?
The GCC is not one country and the response of the six member states to a ‘lower for longer’ oil price scenario will differ greatly. Their respective starting points in terms of sovereign balance sheet health and current spending levels are also very different. On the assumption of no significant move in oil during 2016, growth will continue to cool, to varying degrees. Government expenditure will recalibrate and leaders will find it easier to justify further subsidy reductions. However, despite the many benefits of lower spending, leaders will be mindful that very sharp cuts may impact political stability, social cohesion and indeed their own development targets. We expect policymakers to use their reserves for the reason they were built: to act as a buffer during a period of low oil prices. Are you concerned that the low oil price will affect your business?
In general, growth of the asset and wealth management industry is a function of excess liquidity. An extended period of lower oil prices reduces liquidity and is obviously not a helpful backdrop. That said, vast pools of wealth remain and the penetration of professional asset management remains extremely low in the region.  Our job remains unchanged: to demonstrate the value proposition we bring and to be the trusted investment partner for current and prospective investors. What asset classes and investment products do you expect will attract demand from Middle East-focused investors in the year ahead?
Given the sell-off in 2015, investors will certainly look at GCC equities very closely in 2016. However, I would expect international real estate (particularly in the US and Western Europe) and income generating assets to be in favour, in addition to the traditional favourite of cash deposits.  Investors seem well versed with the potential downside risks ahead, but upside opportunities for regional markets include an end or significant reduction in hostilities in Syria or Yemen, an improvement in oil prices and a realisation that a number of companies with outstanding prospects can now be bought at attractive valuations. MUHAMMAD SHABBIR, HEAD OF EQUITY FUNDS AND PORTFOLIO MANAGEMENT, RASMALA What is your outlook for the economies of the GCC in the next one to two years?
Real GDP growth in the GCC is expected to slow to around 3.1% in 2015 from an estimated 2014 number of 3.9%. Real non-oil GDP growth will decelerate to 4.7% from 5.6%. The budget shortfall in Saudi Arabia is forecast to hit 19% of GDP, around 5% in the UAE and about 1% in Qatar. To meet funding needs, governments are resorting to heavy drawdowns of foreign assets, a reduction in government deposits in the banking system and additional borrowings. The GCC macro story will most likely remain weak for the coming few years if oil prices stay low. A common expectation is twin deficits and weaker GDP growth as softness in the hydrocarbon sector will also impact non-hydrocarbon sector growth. Although we feel the economic status quo could be maintained in the near term, despite the sluggishness in oil prices and regional geopolitical threats, the domestic costs of an unchanged policy choice would become burdensome. In Saudi Arabia, this will make safeguarding foreign reserves difficult and borrowing may have to be accelerated. In the UAE, the economic soft landing is already taking place with the real estate market getting weak and economic activity facing headwinds. Domestic liquidity is tightening and credit problems are increasing in the commercial and SME [small to medium enterprise] loans segments of the local banking system. The presence of macro buffers and adequate bank capital mitigate vulnerability of the economy as a whole. In Qatar, economic growth is expected to remain decent, albeit compared to a downwardly revised 2014 figure. Are you concerned that the low oil price will affect your business?
Any meaningful decline in liquidity will have a negative impact on the demand for investment products. This derives from rampant short-termism in the region and the fact that little distinction is made between ordinary savings tools, such as deposits, and formal investments, which are relatively long-term in nature and have an embedded element of financial planning. Our fear is that as liquidity is rationed, deposits will take precedence over more proper investment products which have an association with long tenor.  On the positive side, we may see an increasing level of institutionalisation as only very professional and disciplined managers will remain in the asset management space. What asset classes and investment products do you expect will attract demand from Middle East-focused investors in the year ahead?
What lower oil prices and, perhaps, rising interest rates would do is to intensify competition between asset classes and investment products. Not only will generating returns be difficult, but also the  risk side of the equation will get more challenging due to the changing economic environment and credit landscape.  Banks, which had been good conduits for directing investments into products through their distribution and private banking platform, will become competitors as liquidity tightens.  We believe the seemingly risky but rewarding product types such as equities will have a place in the future menu. ©2015 funds global mena

Executive Interviews

EXECUTIVE INTERVIEW: A natural interest in the topic

Mar 08, 2017

Since 2016, Guillermo Ortiz has been a chairman of Latin America’s BTG Pactual. The former central banker of Mexico talks to Nick Fitzpatrick.

We’ll launch our first equity fund next year

Dec 08, 2016

Not many banks plant olive trees, but the Bank of Palestine has a social mission. It also has ambitious expansion plans, says chairman Hashim Shawa. He talks to George Mitton.

Roundtables

SOUTH AFRICAN ROUNDTABLE: Spirit of Ubuntu

Mar 08, 2017

The move to a three-day settlement cycle, the appearance of new stock exchanges, and recent rules on hedge funds were discussed by our panel in Cape Town. Chaired by George Mitton.

ROUNDTABLE: Growing pains

Mar 08, 2017

Our panel in Qatar spoke about frustration with regulators, a shortage of listed companies and plans for a new financial city in Doha. Chaired by George Mitton.