QFC ASSET MANAGEMENTgraphics.eiu.com/upload/QFC_ASSET_MANAGT_290807.pdfMarkets Authority (CMA) in...

Asset management in the Middle EastThe prospects for global financial institutionsA report from the Economist Intelligence UnitSponsored by Qatar Financial Centre

© The Economist Intelligence Unit 2007 1

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 regionOur sincere thanks go to all the interviewees and

survey respondents for sharing their insights on this topic.

August 2007

2 © The Economist Intelligence Unit 2007


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

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



growing proportion of respondents say that they expect at least some of their products to be Shariah-compliant.

● 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 thelevels of investment in your asset management business in theMiddle East? (% of respondents)

Substantial increase

Slight increase

No change

Slight decrease

Significant decrease

Not applicable

35

49

9

3

1

2

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.

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.

2 3 4 5Not at all

significant

1Very

significant

0 20 40 60 80 100

How significant are the following factors in encouraging investment in asset management in the Middle East? (% of respondents)

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




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.



Investment opportunities

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

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

0 10 20 30 40 50

Private banking services

Private equity

Retail investment

Property

Mutual funds

Islamic fixed income market (sukuk)

Hedge funds

Conventional fixed income market

Other

Which of the following sectors do you think offer the bestinvestment opportunities in the Middle East for your organisation?(% of respondents)




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

Joint venture with localfinancial services company

Opening our own localoffices

Merger or acquisition

We do not yet have apresence in the MiddleEast

We do not intend toincrease our presencein the Middle East

30

22

21

15

10

2




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.”

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



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

2 3 4 5Not at allimportant

1Very

important

0 20 40 60 80 100

When considering where in the Middle East to locate your asset management operations, how important are the followingconsiderations?(% of respondents)

Government policies towards foreign investment

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




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 Islamicfinance principles?(% of respondents)

Some of our productsare/will be Shariah-compliant

None of our productsare/will be Shariah-compliant

All our productsare/will be Shariah-compliant

Don’t know/Not applicable

27

26

11

36




say that some of their products are currently Shariah-compliant 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 complywith Islamic finance principles in three years’ time? (% of respondents)





41

27

19

14




Investor culture

The market correction of 2006, in which up to two-thirds 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.

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.”



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 co-operate 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.”



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

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

AppendixIn 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 locatedin the Middle East? (% of respondents)

No, but it is an option weare exploring or mayexplore in the future

No, and this is unlikelyto be something wewould consider

Yes

48

33

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 asingle office located inone Middle East state

We manage/will manageMiddle East operationsthrough our officeslocated outside theregion

We do not have/willnot have any assetmanagement operationsin the Middle East

We have/will have severaloffices located in severalMiddle East states

Don't know

29

25

23

16

7

Which of the following best reflects the way yourorganisation expects to manage its asset managementoperations in the Middle East in three years’ time? (% respondents)

We have/will have asingle office located inone Middle East state

We manage/will manageMiddle East operationsthrough our officeslocated outside theregion

We have/will have severaloffices located in severalMiddle East states

We do not have/will nothave any assetmanagement operationsin the Middle East

Don't know

33

25

23

5

14

What proportion of your global asset management portfolio iscurrently derived from your Middle East operations?Please select one only.(% of respondents)

0%

0.1% to 4%

5% to 9%

10% to 19%

20% to 29%

30% or more

24

33

24

10

5

5



0 20 40 60 80 100

Approximately how many employees do you have engaged in the following activities in the Middle East?(% of respondents)

10-50 51-100 >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)

10-50 51-100 >100>100

Investor administration and servicing

Investment operations

Product development

Distribution

Custody

Internal audit and compliance

In the next three years, what change do you expect to thelevels of investment in your asset management business in theMiddle East? Please select one only.(% of respondents)

Substantial increase

Slight increase

No change

Slight decrease

Significant decrease

Not applicable

35

49

9

3

1

2

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)

Strategic alliance

Joint venture with localfinancial services company

Opening our own localoffices

Merger or acquisition

We do not yet have apresence in the MiddleEast

We do not intend toincrease our presencein the Middle East

30

22

21

15

10

2



0 20 40 60 80 100

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

Please indicate whether you agree or disagree with the following statements.(% of respondents)

Agree Neither agree or disagree Disagree

Slight increase No change Slight decrease Significant decreaseSignificant increase Don’t know/ Not applicable

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)

Equities

Bonds

Property

Private equity

Hedge funds

Cash/money market

Structured products

Derivatives

Commodities

Islamic products



0 10 20 30 40 50

Which of the following assets are you most focused on in terms of product development in the Middle East? Select up to three.(% of respondents)

Equities

Property

Bonds

Private equity

Structured products

Cash/money market

Hedge funds

Derivatives

Commodities

Don't know

0 5 10 15 20 25 30 35 40

Which regions currently attract the largest proportion ofequity investment among your Middle East clients?(% of respondents)

North America

Asia-Pacific (Japan, South Korea, Singapore, Hong Kong)

Europe

Emerging markets

Middle East


0 5 10 15 20

Which regions currently attract the largest proportion ofinvestments in bonds among your Middle East clients?(% of respondents)

North America

Europe


Middle East

Emerging markets


0 5 10 15 20

Which regions currently attract the largest proportion ofproperty investments among your Middle East clients?(% of respondents)


Europe

North America

Middle East

Emerging markets


0 1 2 3 4 5 6 7 8

Which regions currently attract the largest proportion ofcash/money market investments among your Middle East clients?(% of respondents)


North America

Europe

Emerging markets

Middle East




0 5 10 15 20 25 30 35 40

Over the next three years, in which regions do you expectto attract the biggest increases in equity investment amongyour Middle East clients?(% of respondents)

North America


Emerging markets

Europe

Middle East


0 5 10 15 20

Over the next three years, in which regions do you expectto attract the biggest increases in bond investments amongyour Middle East clients?(% of respondents)

North America


Europe

Middle East

Emerging markets


0 5 10 15 20

Over the next three years, in which regions do you expectto attract the biggest increases in property investment amongyour Middle East clients?(% of respondents)


North America

Middle East

Emerging markets

Europe


0 1 2 3 4 5 6 7 8

Over the next three years, in which regions do you expectto attract the biggest increases in cash/money marketinvestment among your Middle East clients?(% of respondents)

North America

Emerging markets


Europe

Middle East


How are your assets under management in the Middle Eastcurrently divided in terms of your client base?(% of respondents)

Institutional

Retail

65

37



2 3 4 5Not at all

significant

1Very

significant

0 20 40 60 80 100

How significant are the following factors in encouraging investment in asset management in the Middle East? (% of respondents)

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


1Very

important

0 20 40 60 80 100

When considering where in the Middle East to locate your asset management operations, how important are the followingconsiderations? Please rate 1 to 5 where 1 is very important and 5 is not at all important.(% of respondents)

Government policies towards foreign investment

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 10 20 30 40 50

Private banking services

Private equity

Retail investment

Property

Mutual funds

Islamic fixed income market (sukuk)

Hedge funds

Conventional fixed income market

Other

Which of the following sectors do you think offer the bestinvestment opportunities in the Middle East for your organisation?Please select up to three.(% of respondents)

To what extent does your organisation comply with Islamicfinance principles?(% of respondents)





27

26

11

36

To what extent does your organisation expect to complywith Islamic finance principles in three years’ time? (% of respondents)





41

27

19

14

0 10 20 30 40 50

In which of the following areas do you think infrastructure andintermediary requirements are most lacking in the Middle East?Select up to three.(% of respondents)

Regulators

Legal services

Rating agencies

Analysts

Independent financial advisers

Accountancy firms

IT systems and service providers

Broker networks

Actuarial consultants

Training and industry associations

Assurance advisory

Other




1Very

important

0 20 40 60 80 100

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)

Stock market instability

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 5 10 15 20 25 30

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



About the respondents

0 5 10 15 20 25 30 35 40

What are your organisation’s global assets in US dollars?(% of respondents)

Under $1bn

$1bn to $10bn

$10bn to $25bn

$25bn to $50bn

$50bn to $100bn

$100bn to $150bn

$150bn to $200bn

$200bn to $250bn

Over $250bn

Not applicable

0 10 20 30 40 50

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 5 10 15 20 25

Which of the following best describes your title?(% of respondents)

Manager

CEO/President/Managing director

SVP/VP/Director

Head of Business Unit

Other C-level executive

Head of Department

CFO/Treasurer/Comptroller

Board member

CIO/Technology director

Other



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.

0 5 10 15 20 25 30 35

Finance

General management

Strategy and business development

Risk

Marketing and sales

Information and research

Operations and production

IT

Customer service

R&D

Human resources

Legal

Supply-chain management

Procurement

Other

What are your main functional roles?(% of respondents)

0 5 10 15 20

Financial services consulting

Investment banking

Corporate banking

Asset management/Custodian

Wealth management

Diversified banking institution

Retail banking

Capital markets

Trading

Private equity/Venture capital

Real estate/Leasing

Hedge fund

Non-life insurance

Life insurance

Broker-dealer

Stock exchange/Trading system

Credit card issuer/services

Other

What is your primary industry?(% of respondents)

LONDON26 Red Lion SquareLondon WC1R 4HQUnited KingdomTel: (44.20) 7576 8000Fax: (44.20) 7576 8476E-mail: [email protected]

NEW YORK111 West 57th StreetNew York NY 10019United StatesTel: (1.212) 554 0600Fax: (1.212) 586 1181/2E-mail: [email protected]

HONG KONG6001, Central Plaza18 Harbour RoadWanchai Hong KongTel: (852) 2585 3888Fax: (852) 2802 7638E-mail: [email protected]

Date post:	13-Jul-2020
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times

QFC ASSET MANAGEMENTgraphics.eiu.com/upload/QFC_ASSET_MANAGT_290807.pdfMarkets Authority (CMA) in...

Documents