Yet investor uncertainty as a result of the unrest continues to be a dominant investment theme in the region, the researchers discovered.
This and other findings are included in these researchers’ report, which Invesco executives formally unveiled this morning in Dubai.
According to the report – Invesco’s third Middle East Asset Management Study in three years – an expectation in early 2011 that “risk appetite would increase and time horizons lengthen” by this January and February turned out to be wrong.
Instead, “target returns have declined, and are now expected (in aggregate) to reduce further into 2013,” the NMG researchers note in their report.
Investment time horizons have also shortened and exposures to tangible assets have increased year on year, they also say.
Nick Tolchard, head of Invesco’s Middle East operations, said the "Arab Spring of 2011 "has persisted, and remains a current and long-term trend in the Middle East", to an extent investors had not foreseen a year ago.
However, he noted that there were other factors as well that "haven’t made the life of the investor in the Gulf any easier or [made him] feel more confident".
For example, a “persistent hangover” from the global financial crisis, as well as the continuing European sovereign debt crisis, are continuing to “create much more volatility in markets than perhaps people were expecting 12 months ago”, Tolchard noted.
Certainly the Invesco data suggests this to be the case. In last year’s study, the 54 retail investment industry respondents surveyed said they expected retail risk appetite to increase by a net 14% over the coming year, but in fact it fell by 19%.
A year older and wiser, the 60 respondents interviewed for the latest report said that they expect retail risk appetite to fall 21% over the next 12 months, the report shows.
Safe haven factor
Much of the data contained in the Invesco report, which runs to more than 30 pages, is shaped by Arab Spring attitudes, as those with money in countries caught up in the uprisings sought safer places to house it.
Thus as capital flowed out of the wider Middle East and North Africa (MENA) region, much stayed in the Gulf, and flowed into the GCC – though not uniformly.
For while Saudi Arabia, the UAE and Qatar all saw a “significant inflow”, the Invesco report finds, such GCC member states as Oman, Kuwait and Bahrain actually ceded assets themselves. (In the case of Arab Spring-rocked Bahrain in particular, this may not be entirely surprising.) (See chart,
Meanwhile, as GCC retail investors who live in their own country were showing a “slight increase in allocation to local fixed income” investments earlier this year, compared with the same period a year earlier, a more dramatic increase in such investments was found among Arabs living as expatriates in the GCC countries – for example, those who may have fled Arab Spring-affected countries – Tolchard points out.
And they are looking for yields as well as securities, the data shows, according to Tolchard, pointing to the report’s finding of a preference for such corporate bonds as those of some well-known Dubai companies over low-yielding sovereign debt.
“If you invest in Qatar sovereign debt [maturing in 2017], you get 2.5%, and sovereign debt everywhere else is [even more miniscule]. Whereas 2017 DP World and Dubai Holding [corporate] bonds can give you 5% and 10% yields [respectively].
“If you add this to an urgent desire to get one’s money out of where it is and place it someplace secure, you can see why this preference for the corporate bonds is happening.”
This trend, he adds, also reveals that “the worries about Dubai’s debt have faded a lot” over the past year to 18 months.
Governments mindful of unrest
Drilling down further, Invesco discovered that the way the GCC governments were allocating funding suggested that they, too, are taking geopolitical concerns into account.
For example, even though the average citizen in the GCC countries is wealthier and more content than his or her counterpart in the MENA regions affected by the Arab Spring, “GCC governments are still under pressure to clearly show that the region’s large, commodity-linked wealth is reaching [their] local population,” the study notes.
“This manifests itself in increased government spending and increased allocations to sovereign wealth fund profiles with local development objectives, [such as] development agencies and policy supporters.”
The 2012 Invesco Middle East Asset Management Study may be viwed on Invesco’s website for Gulf investors by clicking here.
Other key findings:
- A relative lack of capital flow exists between GCC member countries; this is found to be due to the “protected advantage” typically enjoyed in these countries by “family businesses…run by well-connected GCC locals with monopoly (or oligopoly) rights within certain industries”, which enable such businesses to thrive in their home country, but to struggle to cross borders “because equivalent family businesses [in the other country] often have the same protected advantage”, creating a high barrier to entry for outsiders
- As a result, “where business expansion has been successful, it has typically involved entry into larger but less protected markets within MENA (ex-GCC) or in India”
- Of the money moving into the GCC, that which has gone to “economically attractive regions such as Qatar and Saudi” are believed to be “structural, and linked to corporate investment”, while assets entering “safe havens” in the GCC such as the UAE “may be short term in nature”, and thus may be expected to the MENA region once the reasons for moving it have ceased to exist
- Jordan in particular has been the beneficiary of money being moved out of Syria, its besieged neighbour to the north, with which it has deep historical ties
- Last year, the Invesco researchers discovered that high net worth individuals in the GCC were investing in businesses rather than the markets, either through stocks or funds, in expectation of very high returns. This year, according to Tolchard, it continues to be an extremely important driver, especially among single family offices
- While a fall in the “home market bias” shown by expatriate Arab investors is understandable in the context of the Arab Spring uprisings that made many MENA markets undesirable, another factor was seen in the rise in non-resident Indian retail investor in their home market: A significantly better interest rate environment home
Middle East/North Africa’s
capital flow winners and losers, 2011-2012
|
Winners
|
% increase in private capital flows
|
Losers
|
% decrease in private capital flows
|
|
Saudi Arabia
|
+27.9%
|
Egypt
|
-29.1%
|
|
United Arab Emirates
|
+25.3%
|
Syria
|
-13.6%
|
|
Qatar
|
+19.7%
|
Libya
|
– 9.8%
|
|
Jordan
|
+2.2%
|
Bahrain
|
-6.4%
|
|
Turkey
|
+1.5%
|
Tunisa
|
-6.3%
|
|
Morocco
|
+1.2%
|
Kuwait
|
-5.2%
|
|
|
|
Lebanon
|
-2.6%
|
|
|
|
Iraq
|
-2.5%
|
Source: Invesco Middle East Asset Management Study 2012
|
GCC Retail Investor Home Market Bias
|
||
|
Type of GCC investor
|
2011 report
|
2012 report
|
|
Non-resident Indian
|
31%
|
37%
|
|
Arab expatriate
|
27%
|
10%
|
|
GCC local
|
55%
|
54%
|
Source: Invesco Middle East Asset Management Study 2012
Home market bias is defined as “the ‘excess’ allocations to home markets, that is, after the removal of non-home-market investor allocations to a particular home market.
Respondent sample split is:
NRI =13 in 2011, 15 in 2012; Arab expat =6 in 2011, 5 in 2012; GCC local =36 in 2011, 43 in 2012
