The funds industry needs to be developed to allow expatriates to invest in local markets and help reduce trading volatility, financial experts say. Investment vehicles such as social security funds open to foreign residents could encourage expatriates to put their savings into markets, rather than sending their remittances home. A greater presence of local institutional investors in markets would also ensure more longer-term stability than that provided by foreign short-term investors from outside the region, experts say.
Institutional investors account for a smaller proportion of trading on local markets than in foreign bourses. The value of stocks on the Dubai Financial Market bought by institutional investors, local and international, formed only 21 per cent of the total value of stocks traded last year, compared with 40 per cent bought by foreign investors. "The Gulf has a strong expatriate population," said Dr Nasser Saidi, the chief economist at the Dubai International Financial Centre. "Those expats don't invest in the region. We need to develop pension funds and mutual funds, as the institutional funds industry has a very important part to play in ensuring that instead of expatriate money going out of the region, it stays here and is part of the saving and investment process."
Foreign investors were blamed for huge inflows of speculative money in 2008, stoking high inflation and a housing bubble as expectations rose that the dirham would be revalued. The revaluation did not happen and the financial crisis generated a sudden outflow of an estimated Dh180 billion (US$49bn), leaving the local economy cash-starved. "We have been hurt a lot by short-term investment," said Mohammed Ali Yasin, the chief executive of Shuaa Securities, which is the brokerage arm of the investment bank Shuaa Capital. "Institutional investors are the biggest contributors to the US and UK markets, and it needs to be the same here."
At present, no government social security system caters for foreign expatriates, although some private companies have corporate pension schemes. Some foreigners instead choose to set up their own pension plans, usually in their home country. After allowing expatriates to invest in property and own stakes in foreign companies, enabling them to invest through mutual funds should be the next step, Dr Saidi said.
"If we now allow them to go into the markets they will become more attached and we will have an investment process that is much less volatile and more related to the fundamentals of the region," he said. Funds from the end of service gratuity schemes provided by companies could also be invested in local markets with contributions from expatriate employees, said Dr Giyas Gokkent, the chief economist and head of research with the asset management group at National Bank of Abu Dhabi.
"Some kind of mandatory mechanism, whereby companies have to put aside a certain amount and expatriate employees contribute to invest in local markets, could be a solution to creating investors with a longer-term horizon," Dr Gokkent said. @Email:email@example.com