Asset management in
the Middle East
The prospects for global
financial institutions
A report from the Economist Intelligence Unit
Sponsored by Qatar Financial Centre
Asset management in the Middle East
The prospects for global financial instututions
About the research
Asset management in the Middle East: The prospects for
global financial institutions is a briefing paper written
by the Economist Intelligence Unit and sponsored by
Qatar Financial Centre (QFC). The findings and views
expressed in this briefing paper do not necessarily
reflect the views of QFC, which has sponsored this
publication in the interest of promoting informed
debate. The Economist Intelligence Unit bears sole
responsibility for the content of the report.
The main author was Mushtak Parker and the editor
was Rob Mitchell. The findings are based on two main
strands of research:
● The Economist Intelligence Unit conducted an
online survey of 180 senior executives of financial
services firms from around the world.
● We also interviewed several senior executives
from financial services firms to ascertain their
views on the environment and prospects for
asset management in the Middle East. In
these interviews, we asked about the biggest
opportunities and growth areas, along with some
of the challenges that face banks as they develop a
presence in the region
Our sincere thanks go to all the interviewees and
survey respondents for sharing their insights on this
topic.
August 2007
© The Economist Intelligence Unit 2007
1
Asset management in the Middle East
The prospects for global financial instututions
Introduction
Asset management in the six countries of the Gulf
Co-operation Council (Bahrain, Kuwait, Oman, Qatar,
Saudi Arabia and the UAE) is on the march. Strong
liquidity resulting from high oil and gas prices, a
growing maturity among investors, the repatriation of
assets following 9/11 and the development of Islamic
finance have all contributed to creating a thriving
environment for both local and international banks.
Accordingly, many are ramping up their operations
and developing a strong presence on the ground.
There are compelling reasons to adopt this
approach. According to The 2007 World Wealth
Report, published by CapGemini and Merrill Lynch,
there is an estimated private liquidity of $1.4 trillion
in the GCC region, most of it in Saudi Arabia, UAE,
Qatar and Kuwait. While this is still a relatively modest
sum compared with the developed markets of the US,
UK, EU and Asia, it nevertheless represents a valuable
opportunity for an industry hungry for market and
geographic expansion. As local capital markets
develop and become more open to a broader range
of investors, the scope for new product development
becomes more widespread.
Despite this rosy picture, there remains a steep
learning curve to climb for many of the GCC markets. A
lack of disclosure and transparency remains a concern
for many financial services companies, as does the
regulatory environment and a perceived lack of
required intermediaries and infrastructure. A shortage
of finance professionals in the region, especially those
with expertise in Islamic finance, is also a problem.
And despite ongoing market liberalisation, barriers to
entry remain and regional integration is limited.
Based on a survey of senior financial services
executives and a series of in-depth interviews,
this briefing paper, sponsored by Qatar Financial
2
© The Economist Intelligence Unit 2007
Centre, assesses the appetite among Western
financial services organisations for developing an
asset management presence in the GCC countries. It
explores some of the risks and challenges involved,
examines strategies for developing a presence in the
GCC countries and looks at the likely prospects for
growth in the years ahead.
The key findings of the survey and interviews
include the following:
● Expectations for further expansion. The vast
majority of respondents questioned for the survey
indicate that they expect to increase the levels of
their investment in asset management operations
in the Middle East. Just under half—49%—said that
they expected a slight increase and 35% said they
expected a substantial increase. The most significant
factors encouraging further investment include the
large numbers of high-net worth individuals in the
region, which 79% consider significant, the ongoing
liberalisation of financial markets, cited by 69%; and
the improved governance and regulatory environment
in the region, cited by 66%.
● Investment opportunities. Growing private wealth
in the Middle East, which is estimated to be increasing
by 11.9% a year, is fuelling strong demand for wealth
management and private banking services. According
to the survey, this is the area that currently presents
the best opportunities. Other areas that are seen as
offering strong opportunities include private equity
and retail investment.
● A shift towards Islamic finance. Both survey
respondents and interviewees are confident that the
growth of the Islamic finance sector will continue.
To date, it has not been particularly strong in many
areas of asset and fund management, but this is likely
to change. Almost 60% of respondents say that they
expect a substantial increase in demand for Islamic
finance products over the next three years, and a
Asset management in the Middle East
The prospects for global financial instututions
growing proportion of respondents say that they
expect at least some of their products to be Shariahcompliant.
● Deterrents to investment. Despite progress being
made in areas such as the regulatory and business
environment, respondents point to a number of
deterrents to further investment in the region.
Concerns about the geopolitical environment remain
high on the agenda for many in the sector, with 71%
citing this as significant. A lack of transparency and
poor standards of the regulatory regime are also
raised as an issue, with 65% citing these as deterrents
to investment.
Appetites for investment
For international financial institutions, the GCC
represents a market opportunity that simply cannot
be ignored. According to a survey of 180 global
finance professionals, conducted by the Economist
Intelligence Unit on behalf of Qatar Financial Centre,
there is a very strong appetite for further investment
in the region.
Among the respondents, who either already had
operations in the GCC or were considering whether to
enter the market, 84% expected to increase the levels
of their investment in asset management in the GCC
over the next three years. Asked about the number
of staff they currently employ in the region and how
many they expected to employ in three years’ time,
there was also a noticeable increase across the full
range of activities, including investor administration
and servicing, product development and distribution.
The most important factor encouraging further
investment in the region, according to our
respondents, is the wealth of potential clients. More
In the next three years, what change do you expect to the
levels of investment in your asset management business in
theMiddle East?
(% of respondents)
Substantial increase
35
Slight increase
49
No change
9
Slight decrease
3
Significant decrease
1
Not applicable
2
Source: Economist Intelligence Unit survey, August 2007.
© The Economist Intelligence Unit 2007
3
Asset management in the Middle East
The prospects for global financial instututions
How significant are the following factors in encouraging investment in asset management in the Middle East?
(% of respondents)
1
Very
significant
2
3
4
5
Not at all
significant
Large number of high net worth individuals
Rapid growth of Islamic finance market
Liberalisation of financial markets
Ongoing privatisation programmes
Growing maturity of investor culture
Improved governance and regulatory environment
Opportunities arising from infrastructure investments
Opportunities arising from diversification into non-hydrocarbon industries
0
20
40
60
80
100
Source: Economist Intelligence Unit survey, August 2007.
than 50% say that the large number of high net worth
individuals in the region is a very significant factor
driving their investment decisions. Other factors that
are seen as important include the liberalisation of
financial markets, which is seen as very significant
by 31% of respondents, the improved governance
and regulatory environment, and opportunities for
infrastructure investments, which are both cited as
very significant by 30%.
According to the 2007 World Wealth Report,
there are some 300,000 high net worth individuals
in the Middle East, out of a global total of 9.5m. This
represents a year-on-year growth in 2006 of 11.9%—a
much faster rate than that seen in either North
America or Europe.
The growing ranks of the wealthy have fuelled
demand for private banking and asset management
activities in the region, prompting many banks to
increase their presence significantly. In the past,
the sales teams of the major international private
banks in the GCC may have comprised two or three
people. Today, teams of 15 or more are becoming
commonplace.
4
© The Economist Intelligence Unit 2007
The way in which these wealthy individuals invest
has also changed. Historically, Middle Eastern
liquidity looking for asset management services has
tended to look abroad to the major international
players. But, following 9/11, a lot of this liquidity was
repatriated to the region, and investors increasingly
sought local opportunities for investment in both
conventional and Islamic offerings.
This phenomenon has coincided with the growth
and development of the Middle East capital markets,
which increasingly focus on local capacity to source
and originate trade, and to analyse local risk. As a
result, more and more financial institutions and banks
are now providing bespoke asset management services
focusing on local capital markets and private equity.
The political, economic and financial reforms that
have taken place in the region in the past few years
have made a significant difference to the environment
in which local and international asset managers now
operate. Although the pace of these reforms varies
from country to country, there was a consensus among
the interviewees questioned for this report that much
progress has been made.
Asset management in the Middle East
The prospects for global financial instututions
Dr Mulham Alwani, Managing Director, Head of
Middle East Sales and Islamic Finance at Royal Bank of
Scotland, is confident that the regional stock markets
are now fairly well developed and sophisticated, as
well as having reasonable liquidity. And although
there is scope for further development of the legal
infrastructure, he believes that some of the countries
are moving quickly to implement this.
“Bahrain has had a legal code which is very closely
connected to the English legal code and it has a
well developed offshore centre established in the
1970s,” he says. “Dubai and Abu Dhabi have made
much progress. Similarly, the creation of the Capital
Markets Authority (CMA) in Saudi Arabia, and the
kingdom’s membership of the WTO, will help revitalise
the infrastructure of the local legal code. Qatar, too,
is developing fast, and the development of the Qatar
Financial Centre will have a very strong impact on
making the Qatar legal code transparent and robust.”
Imran Sattar, Head of UK equities at BlackRock,
the asset management joint venture of Merrill
Lynch, commends the GCC countries for getting their
act together in reinvesting the surplus cash flows
generated from oil and gas. “Historically, they have
wasted cash on various things. Now they are building
the infrastructure and the economy to diversify the
revenue sources. That is a real positive for them. In
five or ten years’ time, there is a very good chance that
cash flows for these governments will be less reliant
on oil and will be much more broadly spread.”
Another positive sign is that local banks are now
entering the sector, primarily offering basic vanilla
products to local investors, especially at the retail
end of the market. In February 2007, for example, the
Bahrain-based Gulf Finance House (GFH) announced
a major restructuring of its operations to include the
new core areas of business such as European private
equity, asset management and wealth management.
Most of these new departments are headed by
experienced UK bankers and asset managers.
Qatar Islamic Bank, one of the largest banks in the
emirate according to chief executive Salah Jaidah, is
also in the process of building its investment banking
activities, including asset management. “Our overall
long-term strategy is to sustain and develop our core
activities, and to further develop exceptional items
such as asset securitisation, sukuk [Islamic bond],
asset management and private banking,” he explains.
© The Economist Intelligence Unit 2007
5
Asset management in the Middle East
The prospects for global financial instututions
Investment opportunities
Which of the following sectors do you think offer the best
investment opportunities in the Middle East for your organisation?
(% of respondents)
Private banking services
Private equity
Asked about what they thought were the most
significant investment opportunities in the
region, the most popular answer, cited by 46% of
respondents, was private banking services. The
presence of international private banks in the Middle
East, of course, is nothing new. For example, Coutts
Bank, a subsidiary of Royal Bank of Scotland, has
maintained a small office in Dubai for many years. But
what has been different about the past few years has
been the dramatic increase in investment in what was
once considered a fairly sleepy backwater of financial
services.
Wealthy families in the GCC traditionally banked
with the bespoke private banks in Switzerland, the
UK, the US and Germany, but now, they have access
to a range of client relationship managers on their
doorstep. Leading banks, including HSBC Private
Bank, Standard Chartered and Morgan Stanley, are all
channeling resources into the region and hoping to
provide a one-stop shop for investors requiring both
commercial and personal financial services.
Sourav Kumar, Chief Marketing Officer, Head of
Sales and Marketing for Middle East at Prudential
Asset Management, says that the emergence of HNWIs
or ultra HNWIs is creating a market for sophisticated
niche products, such as derivatives, hedge funds and
exchange traded funds that are marketed through the
private banks.
Although the market for derivatives is currently
underdeveloped in the GCC, the growing liquidity of
the underlying market and the presence of the large
foreign investment banks are likely to stimulate
developments in this area. Such initiatives would,
however, require market and investor education in the
GCC.
In order to compete, the local banks in the GCC
6
© The Economist Intelligence Unit 2007
Retail investment
Property
Mutual funds
Islamic fixed income market (sukuk)
Hedge funds
Conventional fixed income market
Other
0
10
20
30
40
50
Source: Economist Intelligence Unit survey, August 2007.
are also starting to offer these services and often
work together with international banks to develop or
distribute new products. “When we are working with
local financial institutions that distribute the products
or if we are advising an ultra HNWI, we are part of a
cycle that involves us, the local banks and investors,”
explains Dr Alwani. “In this way, knowledge is shared
within that cycle.”
The second most significant market opportunity,
according to our respondents, is private equity, which
is cited by 42%. Although starting from a low base,
private equity in the Gulf is gradually becoming more
important and significant future growth is forecast.
Gulf-based investors including Arcapita, Investcorp
and Istithmar are now being joined by several large US
and European private equity houses. For example, the
US group Carlyle is looking to raise between US$500m
and US$1bn for a fund focused on investment
opportunities in the Middle East. As market
liberalisation continues, and as capital markets
develop further, the opportunities for buy-outs, and
to exit investments by flotation, are becoming more
Asset management in the Middle East
The prospects for global financial instututions
widespread. These trends are likely to add impetus to
what is still a fledgling industry in this region.
Beyond the rarified world of private banking and
private equity, respondents also see good prospects
with retail investment, with 35% citing it as the most
significant opportunity. Mr Kumar of Prudential
highlights that this is likely to be an important area of
interest for his company. “We are large fund manager
with a big family of equity funds and products,” he
explains. “We will always rely on a large retail equity
investment business and that is where our focus will
be in the region.”
Finally, real estate continues to be seen as one
of the brighter investment opportunities, cited
by 31% of respondents. Although concerns have
been expressed that the real estate sector in some
markets of the GCC could be overheating, Mr Kumar is
confident that future prospects remain bright. “Real
estate as an asset class will continue to be strong
because of the ‘bricks and mortar’ mindset of GCC
investors,” he says.
The confidence of investors in real estate is
evidenced by the proliferation of real-estate backed
sukuk (Islamic bond) issuances, which continues to
show strong development. In the first half of 2007,
for example, Dar Al-Arkan Real Estate Development
Company of Saudi Arabia has issued two sukuk
totalling $1.6bn, which were both well oversubscribed
by institutional, HNWI and retail investors.
Entry and expansion
strategies
Entry or expansion strategies into the region depend
on individual market conditions and the regulatory
environment of the specific GCC country. Looking
at the region as a whole, strategic alliances appear
to be the favoured option, with 31% citing this as
their strategy of choice. This is followed by a joint
venture with a local company, which is cited by 22%
of respondents, and opening up proprietary offices,
which is cited by 21%.
According to Dr Hanna Lehmann, who works in
the Project Finance Department at Commerzbank,
the right strategy would depend on whether the
company had any prior exposure to the market. If not,
she advocates an entry based on strategic alliances
and through participations. Once the company gets
to know the market, it can then consider having
a representative office, a branch or any other
representation.
Whichever route the foreign bank chooses to
take, it is essential that it retains a connection with
ultimate decision-makers in that region, which
If you intend to increase your presence in the Middle East,
what type of expansion strategy are you most likely to favour?
(% of respondents)
Strategic alliance
30
Joint venture with local 22
financial services company
Opening our own local
offices
21
Merger or acquisition
15
We do not yet have a
presence in the Middle
East
10
We do not intend to
increase our presence
in the Middle East
2
Source: Economist Intelligence Unit survey, August 2007.
© The Economist Intelligence Unit 2007
7
Asset management in the Middle East
The prospects for global financial instututions
typically means local governments, institutions and
HNWIs. “Institutions like Deutsche Bank cannot just
go in and create the connections,” says Geert Bossuyt,
Managing Director and Regional Head of Structuring,
Middle East, at Deutsche Bank in Dubai. “We come in
because of our skills set, which is far more difficult
to find locally. People with connections do not
necessarily have the skills set because they don’t have
the tradition.”
In the past few years, the provision of licences
by GCC countries has become more commonplace,
even in countries such as Kuwait that have taken
longer to open up to foreign investors. Royal Bank
of Scotland, for example, has four of its own offices
in the region: a branch licence in the Qatar Financial
Centre, a representative office in Abu Dhabi, a small
private banking Coutts office in Dubai; and a recently
acquired licence from the Central Bank of Bahrain to
establish a representative office in Manama. These
offices complement each other because the bank has
different niches in each market—each with slightly
different requirements.
In markets where a structure such as a joint
venture is not a prerequisite for entry, setting up
company-owned offices, whether a branch licence
or representative office, is likely to be the favoured
approach. “We would prefer 100 per cent ownership to
start our business but we are always a minority,” says
Mr Kumar. “If I go to Saudi Arabia I am a joint venture
partner and I am always very conscious of what our
partners are doing.”
8
© The Economist Intelligence Unit 2007
Business environment
When considering where in the Middle East to locate
their asset management operations, respondents
to the survey focus on four main considerations.
The most important is government policies towards
foreign investors, which is seen as very important by
63% of respondents. Second is rule of law, which is
said to be very important by just over 49%, and third is
the quality of the regulatory and legal regime, which
is cited as very important by just under 49%.
It is natural for international banks to seek
assurance that safeguards, such as the enforceability
of contract law, are in place before they consider
entering a market. The good news, according to Dr
Alwani of RBS, is that there is “little precedence where
international institutions have fallen foul of legal
decisions made against them that should have come
out otherwise.”
Similarly, interviewees stress that issues such as
corporate governance, disclosure and transparency
are being addressed, although they still lag behind
the standards of the western countries. The Middle
East is on the right track, says Dr Alwani, and it is
unrealistic to except everything to change overnight.
But he warns that, if GCC markets want more
international participants and greater confidence
among local investors, then transparency must
assume greater importance.
While progress on regulation, legislation and rule
of law is being made at a national level, many players
would like to see greater regional integration. This
would be akin to European integration in financial
services, whereby companies can distribute products
and services across the EU. “The biggest challenge is
to get market integration in the GCC,” says Mr Kumar.
“You need to have one body to set the rules of the
game. Market integration would be accelerated if
Asset management in the Middle East
The prospects for global financial instututions
When considering where in the Middle East to locate your asset management operations, how important are the following
considerations?
(% of respondents)
1
Very
important
Government policies towards foreign investment
2
3
4
5
Not at all
important
Quality of regulatory and legal regime
Tax regime
Rule of law
Availability of services (e.g. legal, accounting)
Compliance costs
Operating costs
Talent availability/costs
Infrastructure (e.g. transport, telecoms)
Ability to acquire freehold property
Ability to protect property against appropriation
A highly transparent environment
High quality and low cost of living
Low cost of doing business
0
20
40
60
80
100
Source: Economist Intelligence Unit survey, August 2007.
there is a common code of law that companies could
use across the GCC countries.”
In terms of both distribution and access to markets,
regulatory barriers can prove frustrating. In Saudi
Arabia, for instance, foreigners can only invest in
local stocks through local mutual funds. In addition,
Saudi banks are not allowed to distribute third-party
products, with the result that some are offshoring
in Dubai to allow their clients to diversify their
investment portfolios.
More generally, it can be difficult for investors to
gain access to overseas stocks. “If you go to a Bahraini
bank and say I want to buy a Kuwaiti stock, it is not
that straightforward,” says Mr Bossuyt. “In Europe,
that is almost unthinkable. In the GCC, you are also
not allowed to have international brokers. We have
stock exchanges where you can trade stocks but no
exchange markets where you can trade structured
products or tracker certificates.”
As the capital markets and asset management
sector in the GCC continue their rapid development,
there is a corresponding need for robust
administrative services, such as regulators, rating
agencies and legal services. According to our survey
respondents, the area that is currently most lacking
is regulators, followed by legal services and rating
agencies.
While intermediary services in the region are not
as developed as they ought to be, the situation is
changing rapidly. The presence of many international
© The Economist Intelligence Unit 2007
9
Asset management in the Middle East
The prospects for global financial instututions
law firms in the region has strengthened the
availability of legal services and, similarly, the
four major international rating agencies (Capital
Intelligence, Fitch, Moody’s, and Standard & Poor’s)
are also present in the region. “I would say the region
is well served by the rating agencies,” says Mr Bossuyt.
“It is a matter for them to put more people on the
ground to the extent the demand exists.”
More generally, access to qualified local staff with
the requisite skills in asset management remains a
major bottleneck in the region. This applies to both
conventional and Islamic finance. In our survey,
45% of respondents say that the availability and cost
of management skills is a significant deterrent to
establishing operations in the Middle East.
In order to gain access to the relevant skills, many
institutions are casting the net as widely as they can.
Some are bringing in qualified people from Asia,
especially from India, Pakistan, Sri Lanka, Singapore
and Malaysia; and others are relocating staff from
Europe, Australia or the US. But this approach also has
its problems: 53% of respondents cite the difficulty of
relocating staff to the region as being a deterrent to
investment.
Gradually, however, many banks expect to conduct
much higher proportions of their recruitment locally.
Deutsche Bank, for instance, is keen on hiring and
educating local talent. “There is no doubt in my mind
that those who will drive the business of Deutsche
Bank in the region in the next five to ten years will be
local people,” explains Mr Bossuyt.
Role of Islamic finance
The past few decades have seen significant
development in the world of Islamic finance,
especially in areas such as Islamic mortgages, debt
instruments such as sukuk, and on financing, such
as commodities and projects. All the interviewees
agreed, however, that Islamic asset and fund
management has not prospered in the same way. To
date, the Islamic investment and mutual funds sector
has been dominated by the Shariah funds offered by
banks, which are modest in number and funds under
management. “We have hardly touched the tip of the
equity iceberg,” says Adam Ebrahim, CEO of Oasis
Asset Management.
There is widespread agreement, however, that
more Shariah-compliant products will come to the
market—whether retail, institutional or even exotics.
This corresponds with the view held by the survey
respondents, 59% of whom expect demand for Islamic
finance products to increase significantly in the next
three years. In addition, respondents are making
available a broader portfolio of Islamic products: 27%
To what extent does your organisation comply with Islamic
finance principles?
(% of respondents)
Source: Economist Intelligence Unit survey, August 2007.
10
© The Economist Intelligence Unit 2007
Some of our products
are/will be Shariahcompliant
27
None of our products
are/will be Shariahcompliant
26
All our products
are/will be Shariahcompliant
11
Don’t know/
Not applicable
36
Asset management in the Middle East
The prospects for global financial instututions
say that some of their products are currently Shariahcompliant but this figure that rises to 40% in three
years’ time.
One reason for the slow pace of development in
the Islamic fund sector is the absence of the major
global asset managers with the necessary skills and
structuring expertise. Mr Bossuyt believes that the
Islamic finance sector is still awaiting the entry of
the big players, such as Fidelity, Aberdeen Asset
Management and BlackRock—something that is sure
to come with time. “Ultimately this has to do with
critical mass for the major players,” he says. “For
them to set up a new fund, they will need a couple of
hundred million as seed investment. If they are not
convinced they can raise that then they will not come
in.”
The direction that Islamic asset management will
take also depends on the particular market and pool
of investors. “Saudi Arabia is much more clued on to
Shariah-compliant funds,” says Mr Kumar. “But if you
come to the UAE, Qatar, Oman and Bahrain, investors
and institutions are not as rigid in their preference for
Shariah-compliant funds and investment products.”
Another factor that would be likely to stimulate
the market would be the standardisation of contracts
for Islamic products such as commodity Murabaha (a
cost-plus financing tool) and mutual fund templates.
This would help to create liquidity in the market and
reduce transactions costs.
Commerzbank, which recently appointed a head
of Islamic finance, also has high hopes for growth
in the sector. “We have realised the potential of
Islamic finance and are adjusting to that,” explains Dr
Lehmann. She also predicts that international banks
will become more active in the Islamic finance space.
To what extent does your organisation expect to comply
with Islamic finance principles in three years’ time?
(% of respondents)
Some of our products
are/will be Shariahcompliant
41
Don’t know/
Not applicable
27
All our products
are/will be Shariahcompliant
19
None of our products
are/will be Shariahcompliant
14
Source: Economist Intelligence Unit survey, August 2007.
© The Economist Intelligence Unit 2007
11
Asset management in the Middle East
The prospects for global financial instututions
Investor culture
The market correction of 2006, in which up to twothirds of the stock market value was wiped off the
exchanges in some GCC countries, ended a period of
speculation and exuberance that many had warned
had all the trappings of a bubble. But asked whether
investors have learned the lessons of last year’s
painful events, the consensus among our survey
respondents is that they have not, with only 24% of
respondents agreeing that this is the case.
This is a finding with which many of our
interviewees concur. “The retail sector will never
learn,” says Mr Bossuyt, “because it is always driven by
greed and fear. This is no different in Europe, Asia or
anywhere else.”
What was notable about the correction in the
GCC countries was that the bulk of the trading had
been conducted by retail investors. Encouraged by
soaring stock prices, huge numbers of (frequently
inexperienced) private investors flocked to the market
and traded information in internet chat rooms. When
the market turned, however, a huge proportion of
these same investors all rushed for the exit at the
same time, further fuelling the downward pressure
on prices. Had there been a greater proportion of
institutional investors, Mr Bossuyt expects that
exuberant valuations would have been much less
likely. “In developed markets, you have more
institutional investors and they tend to be more
rational,” he explains.
Dr Alwani of RBS stresses that the biggest
challenge is being realistic about valuations.
Irrational exuberance can occur everywhere, and even
sophisticated markets can fall foul of herd mentality.
As such, he would like to see better customer education
about investment in equity markets, which he believes
would make the market less volatile in the long run.
12
© The Economist Intelligence Unit 2007
Ms Al-Kuwaiz agrees and says that the Saudi
market needs more sophistication, diversification
and education. She is wary that Saudi investors,
especially at the retail end, have to be made aware of
the dangers of market exuberance and that investing
in stocks can result in losses as well as gains.
With price earning ratios returning to more
traditional levels, the valuation of many stocks in
the Gulf now looks much more realistic. To date,
however, Dr Alwani says that many investors have
not been willing to return to the market. “Today, we
see another kind of exuberance in the region,” he
explains. “We see stock valuations that are extremely
cheap, but there are no takers.”
On the flipside, Imran Sattar of BlackRock is
disappointed that there is hardly any GCC investment
in UK and European equities. “There has been a lot of
GCC money going into GCC, UK and German real estate
assets. But the one area that has not benefited much
is UK or European or indeed global equities,” he says.
One reason for this, he believes, is that GCC investors
are largely risk averse and therefore equities do not
lend themselves very well to that type of investor.
Beyond the issues of exuberance and volatility,
there are more important structural considerations,
according to Mr Kumar. “If you look at the GCC markets
as a whole,” he says, “they are very sentiment-driven
and they lack depth. Probably half of the stocks are
not traded on any given day. Even if the valuations are
good, the financial markets are not evolved enough to
expect large investments.”
Over time, he expects that GCC investors will need
to rethink their strategies. “There is a perception
that real estate in Western Europe is a low-risk
investment,” he says, “but I have seen real estate
actually delivering negative returns. The returns
involved in UK, European and global equities are very
attractive, but you just have to have the willingness
to take on risk. At the moment I don’t see that
happening in the GCC.”
Asset management in the Middle East
The prospects for global financial instututions
Women as customers
Women in the GCC are an economic force with which to
be reckoned. In Saudi Arabia, they own 10 per cent of
real estate, especially in major cities such as Jeddah
and Riyadh, and 30 per cent of brokerage accounts in
the kingdom. They also own some 40 per cent of the
family-run companies, very often as silent partners.
Saudi women as a whole own estimated cash funds of
SR45bn (US$12bn), of which 75 percent is sitting idle
in bank deposits.
Women customers are an important market for
banks, depending on the pace of political reforms,
gender empowerment and equal opportunities. All
the GCC countries cater for women customers either
on equal terms or through dedicated “women only”
branches or departments. This latter approach tends
to be the case in Saudi Arabia, where segregation of
the sexes is more entrenched.
In some countries, there are more specialised
asset management companies catering for women
investors, such as the Qatar Ladies Investment
Company. Western firms such as London-based
Dawnay Day, have developed a good niche in
serving women HNWIs. In addition, Bramdean asset
management, headed by Nicola Horlick, is planning to
introduce its female-targeted Bramdiva services to the
GCC markets.
At the Jeddah Economic Forum earlier this year, Ms
Horlick set out the strategy for her firm: “Bramdean
aims to build a local company in partnership with local
investors, where a primary objective of the company
will be to invest inwardly into Saudi Arabia by creating
jobs and opportunities for Saudi women within the
country’s cultural parameters. We believe there is
opportunity for these women, often well-educated to
degree level, to use their skills and qualifications for
the benefit of the local economy.”
The company, she added, also plans to cooperate with a local entity to offer financial training
courses, qualifications and seminar programmes
for women investors. The objective would be to help
them develop their knowledge and understanding
of financial instruments and markets, and to
encourage them to develop a balanced and diversified
investment portfolio.
The downturn in the stock markets in 2006 and
the emergence of sukuk, together with the buoyant
real estate market, offer good prospects for women
investors, believes Samra Al-Kuwaiz, managing
director of the Women’s Division of Osool Brokerage
Company in Saudi Arabia. “Women tend to be risk
averse,” she explains. “The best kind of investment
opportunity for them would be a diversified portfolio,
based primarily on equities, bonds, sukuk and real
estate.”
© The Economist Intelligence Unit 2007
13
Asset management in the Middle East
The prospects for global financial instututions
Conclusion
The outlook for the asset and fund management
business in the GCC markets is bright for those
international financial institutions that are prepared
to make long-term investments and offer products and
services that are appropriate for local investors. High
oil and gas prices, which are forecast to be sustained
over the medium term, will continue to generate huge
liquidity and provide opportunities for both local and
global players.
Significant progress continues to be made on
improving the business environment, such as the
presence of major legal firms and rating agencies, and
the development of local regulatory infrastructure.
This is encouraging further investment in the region
and reassuring foreign investors that rule of law will
be upheld.
Security concerns and geopolitical risk continue
to be an important issue for foreign investors, but
14
© The Economist Intelligence Unit 2007
the opportunities that are available in the GCC mean
that most banks are prepared to assume these risks.
As one interviewee, questioned for this report, noted:
“For the moment, the risks we are taking in the region
are reasonable for the returns that the bank plans to
make.”
But while the outlook for asset management
in the GCC appears broadly good, there remain
problems to overcome. The availability of experienced
local finance professionals to service this growing
market remains limited, and staff in Europe or the
US can sometimes be unwilling to relocate to the
Middle East. In addition, regulatory barriers in
terms of distribution and access to markets can
prove frustrating, despite ongoing programmes of
liberalisation.
For most banks, however, these drawbacks are
unlikely to serve as deterrents to expansion in the
region. One interviewee summed up the sentiment
when he said: “We don’t feel that there is any upside
in holding back from expansion into the Middle East
because we are positive on its growth outlook.”
Appendix: Survey results
Asset management in the Middle East: The prospects for global financial institutions
Appendix
In May 2007, The Economist Intelligence Unit surveyed 180 senior executives of financial services firms from around
the world. Our sincere thanks go to all those who took part in the survey. Please note that not all answers add up to
100%, because of rounding or because respondents were able to provide multiple answers to some questions.
Do you currently have an asset management business located
in the Middle East?
What proportion of your global asset management portfolio is
currently derived from your Middle East operations?
Please select one only.
(% of respondents)
(% of respondents)
No, but it is an option we
are exploring or may
explore in the future 48
0%
24
No, and this is unlikely
to be something we
would consider
33
0.1% to 4%
33
5% to 9%
24
Yes
10% to 19%
10
20% to 29%
5
30% or more
5
19
Which of the following best reflects the way your
organisation manages its asset management operations
in the Middle East now?
(% of respondents)
We have/will have a
single office located in
one Middle East state 29
We manage/will manage
Middle East operations
through our offices
located outside the
region
25
We do not have/will
not have any asset
management operations
in the Middle East
23
We have/will have several
offices located in several
16
Middle East states
Don't know
7
Which of the following best reflects the way your
organisation expects to manage its asset management
operations in the Middle East in three years’ time?
(% respondents)
We have/will have a
single office located in
one Middle East state 33
We manage/will manage
Middle East operations
through our offices
located outside the
region
25
We have/will have several
offices located in several
Middle East states
23
We do not have/will not
have any asset
management operations
5
in the Middle East
Don't know
© The Economist Intelligence Unit 2007
14
15
Appendix: Survey results
Asset management in the Middle East: The prospects for global financial institutions
Approximately how many employees do you have engaged in the following activities in the Middle East?
(% of respondents)
0
>10
10-50
51-100
>100
Investor administration and servicing
Investment operations
Product development
Distribution
Custody
Internal audit and compliance
0
20
40
60
80
100
In three years’ time, how many employees do you expect to have engaged in the following activities in the Middle East?
(% of respondents)
0
>10
10-50
51-100
>100
Investor administration and servicing
Investment operations
Product development
Distribution
Custody
Internal audit and compliance
0
20
40
60
80
100
In the next three years, what change do you expect to the
levels of investment in your asset management business in the
Middle East? Please select one only.
If you intend to increase your presence in the Middle East,
what type of expansion strategy are you most likely to favour?
Please select one only.
(% of respondents)
(% of respondents)
Strategic alliance
16
Substantial increase
35
Slight increase
49
30
Joint venture with local 22
financial services company
9
Opening our own local
offices
21
No change
Slight decrease
3
Merger or acquisition
15
Significant decrease
1
10
Not applicable
2
We do not yet have a
presence in the Middle
East
We do not intend to
increase our presence
in the Middle East
2
© The Economist Intelligence Unit 2007
Appendix: Survey results
Asset management in the Middle East: The prospects for global financial institutions
Please indicate whether you agree or disagree with the following statements.
(% of respondents)
Agree
Neither agree or disagree
Disagree
Recent stock market volatility in the Middle East has dented long-term investor confidence
Lack of liquidity in capital markets continues to hamper the development of the Middle East asset management sector
There are not enough experienced investment professionals in the region to meet the needs of the asset management industry
We expect demand for Islamic finance products to increase significantly in the next three years
Investors in the Middle East have learned the lessons from last year’s stock market crash
The regulatory regime in the Middle East lacks transparency
0
20
40
60
80
100
Over the next three years, what change do you expect to the proportion of your assets under management allocated to the following?
(% of respondents)
Significant increase
Slight increase
No change
Slight decrease
Significant decrease
Don’t know/ Not applicable
Equities
Bonds
Property
Private equity
Hedge funds
Cash/money market
Structured products
Derivatives
Commodities
Islamic products
0
20
40
60
80
100
© The Economist Intelligence Unit 2007
17
Appendix: Survey results
Asset management in the Middle East: The prospects for global financial institutions
Which of the following assets are you most focused on in terms
of product development in the Middle East? Select up to three.
Which regions currently attract the largest proportion of
investments in bonds among your Middle East clients?
(% of respondents)
(% of respondents)
Equities
North America
Property
Europe
Bonds
Asia-Pacific (Japan, South Korea, Singapore, Hong Kong)
Private equity
Middle East
Structured products
Emerging markets
Cash/money market
Don’t know/Not applicable
Hedge funds
0
5
10
15
20
Derivatives
Commodities
Which regions currently attract the largest proportion of
property investments among your Middle East clients?
Don't know
(% of respondents)
Asia-Pacific (Japan, South Korea, Singapore, Hong Kong)
0
10
20
30
40
50
Europe
North America
Which regions currently attract the largest proportion of
equity investment among your Middle East clients?
Middle East
(% of respondents)
North America
Emerging markets
Asia-Pacific (Japan, South Korea, Singapore, Hong Kong)
Don’t know/Not applicable
Europe
0
5
10
15
20
Emerging markets
Middle East
Which regions currently attract the largest proportion of
cash/money market investments among your Middle East clients?
Don’t know/Not applicable
(% of respondents)
Asia-Pacific (Japan, South Korea, Singapore, Hong Kong)
0
5
10
15
20
25
30
35
40
North America
Europe
Emerging markets
Middle East
Don’t know/Not applicable
0
18
© The Economist Intelligence Unit 2007
1
2
3
4
5
6
7
8
Appendix: Survey results
Asset management in the Middle East: The prospects for global financial institutions
Over the next three years, in which regions do you expect
to attract the biggest increases in equity investment among
your Middle East clients?
Over the next three years, in which regions do you expect
to attract the biggest increases in property investment among
your Middle East clients?
(% of respondents)
(% of respondents)
North America
Asia-Pacific (Japan, South Korea, Singapore, Hong Kong)
Asia-Pacific (Japan, South Korea, Singapore, Hong Kong)
North America
Emerging markets
Middle East
Europe
Emerging markets
Middle East
Europe
Don’t know/Not applicable
Don’t know/Not applicable
0
5
10
15
20
25
30
35
40
0
5
10
15
20
Over the next three years, in which regions do you expect
to attract the biggest increases in bond investments among
your Middle East clients?
Over the next three years, in which regions do you expect
to attract the biggest increases in cash/money market
investment among your Middle East clients?
(% of respondents)
(% of respondents)
North America
North America
Asia-Pacific (Japan, South Korea, Singapore, Hong Kong)
Emerging markets
Europe
Asia-Pacific (Japan, South Korea, Singapore, Hong Kong)
Middle East
Europe
Emerging markets
Middle East
Don’t know/Not applicable
Don’t know/Not applicable
0
5
10
15
20
0
1
2
3
4
5
6
7
8
How are your assets under management in the Middle East
currently divided in terms of your client base?
(% of respondents)
Institutional
65
Retail
37
© The Economist Intelligence Unit 2007
19
Appendix: Survey results
Asset management in the Middle East: The prospects for global financial institutions
How significant are the following factors in encouraging investment in asset management in the Middle East?
(% of respondents)
1
Very
significant
2
3
4
5
Not at all
significant
Large number of high net worth individuals
Rapid growth of Islamic finance market
Liberalisation of financial markets
Ongoing privatisation programmes
Growing maturity of investor culture
Improved governance and regulatory environment
Opportunities arising from infrastructure investments
Opportunities arising from diversification into non-hydrocarbon industries
0
20
40
60
80
100
When considering where in the Middle East to locate your asset management operations, how important are the following
considerations? Please rate 1 to 5 where 1 is very important and 5 is not at all important.
(% of respondents)
1
Very
important
Government policies towards foreign investment
2
3
4
5
Not at all
important
Quality of regulatory and legal regime
Tax regime
Rule of law
Availability of services (e.g. legal, accounting)
Compliance costs
Operating costs
Talent availability/costs
Infrastructure (e.g. transport, telecoms)
Ability to acquire freehold property
Ability to protect property against appropriation
A highly transparent environment
High quality and low cost of living
Low cost of doing business
0
20
20
© The Economist Intelligence Unit 2007
40
60
80
100
Appendix: Survey results
Asset management in the Middle East: The prospects for global financial institutions
Which of the following sectors do you think offer the best
investment opportunities in the Middle East for your organisation?
Please select up to three.
To what extent does your organisation expect to comply
with Islamic finance principles in three years’ time?
(% of respondents)
(% of respondents)
Private banking services
41
Private equity
Some of our products
are/will be Shariahcompliant
Retail investment
Don’t know/
Not applicable
27
All our products
are/will be Shariahcompliant
19
None of our products
are/will be Shariahcompliant
14
Property
Mutual funds
Islamic fixed income market (sukuk)
Hedge funds
Conventional fixed income market
Other
0
10
20
30
40
50
In which of the following areas do you think infrastructure and
intermediary requirements are most lacking in the Middle East?
Select up to three.
(% of respondents)
Regulators
To what extent does your organisation comply with Islamic
finance principles?
Legal services
(% of respondents)
Rating agencies
Some of our products
are/will be Shariahcompliant
27
None of our products
are/will be Shariahcompliant
26
All our products
are/will be Shariahcompliant
11
Don’t know/
Not applicable
36
Analysts
Independent financial advisers
Accountancy firms
IT systems and service providers
Broker networks
Actuarial consultants
Training and industry associations
Assurance advisory
Other
0
10
20
30
40
© The Economist Intelligence Unit 2007
50
21
Appendix: Survey results
Asset management in the Middle East: The prospects for global financial institutions
To what extent do the following factors deter your organisation from establishing operations in the Middle East?
Please rate 1 to 5 where 1 is a significant deterrent and 5 is not at all a deterrent.
(% of respondents)
1
Very
important
Stock market instability
2
3
4
5
Not at all
important
Unstable geopolitical environment
Personal security concerns
Lack of transparency and/or poor standards or regulatory regime
Compliance costs
Lack of knowledge of local markets
Concerns over rule of law/corruption
Availability/cost of management skills
Difficulty in relocating international staff to the region
Poor infrastructure (e.g. transport, telecoms)
Concerns over government policies toward foreign investment
Availability of business support services (e.g. legal, accounting)
Limited size of market for amount of competition
0
20
40
60
What single change would do most to encourage your company
to deepen its asset management operations in the Middle East?
(% of respondents)
Improved security situation
Improved transparency/regulatory environment
More mature investor culture
Increased rate of economic growth in the region
Reduced volatility in capital markets
Change to policies on foreign investment
Greater diversification of regional economies
Greater personal freedom
Readier access to talent
Better quality of life
0
22
5
10
15
20
© The Economist Intelligence Unit 2007
25
30
80
100
Appendix: Survey results
Asset management in the Middle East: The prospects for global financial institutions
About the respondents
Which of the following best describes your title?
(% of respondents)
Manager
CEO/President/Managing director
SVP/VP/Director
What are your organisation’s global assets in US dollars?
(% of respondents)
Head of Business Unit
Under $1bn
Other C-level executive
$1bn to $10bn
Head of Department
$10bn to $25bn
CFO/Treasurer/Comptroller
$25bn to $50bn
Board member
$50bn to $100bn
CIO/Technology director
$100bn to $150bn
Other
$150bn to $200bn
0
$200bn to $250bn
5
10
15
20
25
Over $250bn
Not applicable
0
5
10
15
20
25
30
35
40
In which region are you personally located?
(% of respondents)
North America
Asia-Pacific
Western Europe
Eastern Europe (including CIS)
Middle East and Africa
South America
0
10
20
30
40
50
© The Economist Intelligence Unit 2007
23
Appendix: Survey results
Asset management in the Middle East: The prospects for global financial institutions
What are your main functional roles?
What is your primary industry?
(% of respondents)
(% of respondents)
Finance
Financial services consulting
General management
Investment banking
Strategy and business development
Corporate banking
Risk
Asset management/Custodian
Marketing and sales
Wealth management
Information and research
Diversified banking institution
Operations and production
Retail banking
IT
Capital markets
Customer service
Trading
R&D
Private equity/Venture capital
Human resources
Real estate/Leasing
Legal
Hedge fund
Supply-chain management
Non-life insurance
Procurement
Life insurance
Other
Broker-dealer
Stock exchange/Trading system
0
5
10
15
20
25
30
35
Credit card issuer/services
Other
0
5
10
15
Whilst every effort has been taken to verify the accuracy
of this information, neither The Economist Intelligence
Unit Ltd. nor the sponsor of this report can accept any
responsibility or liability for reliance by any person on
this white paper or any of the information, opinions or
conclusions set out in the white paper.
24
© The Economist Intelligence Unit 2007
20
LONDON
26 Red Lion Square
London
WC1R 4HQ
United Kingdom
Tel: (44.20) 7576 8000
Fax: (44.20) 7576 8476
E-mail: [email protected]
NEW YORK
111 West 57th Street
New York
NY 10019
United States
Tel: (1.212) 554 0600
Fax: (1.212) 586 1181/2
E-mail: [email protected]
HONG KONG
6001, Central Plaza
18 Harbour Road
Wanchai
Hong Kong
Tel: (852) 2585 3888
Fax: (852) 2802 7638
E-mail: [email protected]