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gcc investors cite recent turmoil for short

GCC investors say the recent instability in the Mideast is partly to blame for their short-termism.

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The report, the second in what is now on its way to becoming a series sponsored by global wealth management giant Invesco, is based on in-depth interviews that were conducted in February with 54 institutional and 54 retail investors in the six GCC countries.

As it happens, February was a time of considerable turmoil in the Middle East and North Africa, as it coincided with the so-called ‘Arab Spring’ period of unrest that unfolded across the region in the wake of December riots in Tunisia that ultimately forced that country’s president and prime minister from office, and sparked unrest in such other countries as Egypt, Bahrain, Algeria, Jordan, Syria and Libya.

However, even last year those interviewed by Invesco showed a surprisingly-high propensity to take a short-term approach to their investments. This was explained at that time by such factors as the transient nature of expatriate clients in the region, the losses many experienced during the global financial crisis, and media coverage of Dubai’s debt restructuring.

In this year’s study, more than two thirds of those surveyed – or 69% – said their preferred investment time horizon for investments made in 2011 was less than five years, while fewer than a third (31%) said they took a five years or longer approach. (See table, below.)

Although multiple reasons for this short-termism were also noted this year, with 23% of those interviewed citing a “cultural preference” as among the reasons, and 22% suggesting lack of investor experience was a factor, more than a fifth, or 21%, mentioned regional instability as a contributing cause.

This short-termism itself could be a short-term issue, though, the survey suggests, since nearly one in five of those interviewed, or 18%, said they intended to lengthen their investment time horizons in 2012, compared with just 4% who said they intended to do so this year.

Drilling down

According to Invesco head of Middle East Nick Tolchard, the second Invesco Middle East Asset Management Study was designed to drill down further into the attitudes and behaviours of GCC investors than last year’s report – which was described at the time by Invesco as the first of its kind on such a scale in the six-country GCC region.

As a result, more face-to-face interviews were used this year, unlike last time, when researchers made use primarily of telephone interviews or emailed responses, Tolchard said in an interview.

“This time around we wanted to get closer to the market and to develop rather more of a qualitative engagement with the respondents, in addition to just getting the raw data,” he added.

The work was carried out this year by NMG, the research consultancy, which was involved in helping to produce last year’s report. Those surveyed included  private individuals, corporations, family offices, IFAs, state-backed pension funds, private banks, retail banks, sovereign wealth funds and expatriates across the region.

Home market bias

For GCC wealth advisers with expatriate clients, the patterns of home market bias the Invesco researchers turned up is among the most interesting aspects of the report, Tolchard pointed out, adding that it also has implications for those who conceive investment products for such clients.

According to the report’s findings, GCC locals have a significantly higher bias towards investing in their home market than any foreign group living in the region has for their own market. In other words, the Arab Spring political unrest notwithstanding, these  GCC investors favour their home-grown investment options over those in foreign markets by 55% – that is, such investors tend to be 55% overweight in home market investments.

By comparison, the home market bias shown by Western expatriates is only 22%, non-resident Indians have a 31% bias and Arabs living in the GCC who are not in their home country favour their home market by 27%.

"We think there are probably four reasons why people choose positively to invest in their own market, including [a desire to] mitigate currency risk, and the ease with which they can do it  – for example, a Brit living in Dubai is probably banking with a British bank, so investing back home through the bank is like the path of least resistance." At the same time, he added, "what we call anti-selection factors" are also at play.

"We think tax issues could be one anti-selection factor, acting to keep UK expats from investing back into the UK," he noted.

The Invesco Middle East Asset Management Study 2011 will be posted on Invesco’s website for Gulf investors here.

Other key findings:

  • In addition to preferring short-term time horizons, GCC investor demand for "control and transparency" manifests itself in "a preference for ‘tangible’ assets and direct investments, as opposed to funds and similar products
     
  • Precisely where on the investment spectrum local retail investors from each GCC country sit depends "on their wealth and level of internationalisation", with Bahraini investors being among the most conservative and Qataris the most aggressive. While the degree of Bahraini investment caution seemed greater than it might have been expected to be, given its role as the first financial hub in the region, the report’s authors hypothesise that "Bahraini investors appreciated local political risk even before the Arab uprising spread to Bahrain itself".

    "We would also point to lower wealth levels and thus a greater need for diversification and preservation as potential driver[s] of overweight international exposures."
     

  • GCC investors have shied away from risk in 2011, with more than a quarter of those surveyed saying they had actually decreased their risk exposure. 32% of institutional investors said they either decreased their risk exposure on funds slightly or significantly, and a quarter (22%) of retail investors said they had done the same
     
  • Institutional investors in the GCC "shun" global equities as an asset class, with only 10% of institutional money in this area, compared with 40% of retail money. Observes the report: "Institutional investors seem to be spreading their risk across a much broader range of asset classes compared to retail, investing the same amount in private equity (10%) as in global equities. Local equities are the main choice for [GCC]  institutional investors in 2011 – 32% of assets have been invested in this asset class, more than any other."
Average GCC Investor Time Horizon
Type of GCC investor Preferred time horizon (in years)
Sovereign investor 6.7
Expatriate 5.1
GCC local investor 2.2
 Source: Invesco Middle East Asset Management Study 2011
Total sample =108; sovereigns =18, expatriates =34, GCC investors =56
GCC Investor Home Market Bias
Type of GCC investor Home market allocation Home market bias
Western expatriate 44% 22%
Non-resident Indian 41% 31%
Arab expatriate 31% 27%
GCC local 57% 55%
 Source: Invesco Middle East Asset Management Study 2011
Home market bias is calculated by subtracting the average investor allocation by non-home-market investors from the home market investor allocation
Respondent sample split is Western expat =15, NRI =13, Arab expat =6, GCC local =36

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