The inclusion of the UAE, Qatar and – expected soon – Saudi Arabia in the FTSE Russell and MSCI Emerging Market indices is expected to bring many benefits.
Institutional funds that track the index will include GCC stocks in their portfolios, adding liquidity, new investors and a truly international investor base. These new investors bring higher standards to the region, greater transparency and demand for world-class disclosure levels.
Regional companies will benefit from greater international interest, while regional investors will benefit from rising standards, and the GCC would gain the recognition it deserves for its strongest companies. But now a new mood is being seen in the investment community. Informed market participants are questioning the logic and make-up of emerging market indices.
The Financial Times recently called the MSCI Emerging Markets Index “a triumph of marketing over judgement”. The 24 countries that make up the index hide vast discrepancies: large countries (Brazil, China, Russia) are bundled with small (Chile, Hungary, Qatar). Commodity exporters (UAE, Malaysia) sit alongside commodity importers (South Korea, Taiwan). And it is not only macroeconomics that are being questioned. The risk factors in these countries are widely different.
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Read more:
Saudi Arabia added to watchlist for emerging market status by MSCI
Saudis expect entry to MSCI index by 2019
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For Mexico, the greatest risk is its future relations with the United States. For South Korea, its neighbour to the north provides the greatest risk. How are these correlated? And should they be? These questions must also be set against the current debate over the merits of active versus passive investment strategies. After years of rebalancing away from active managers towards index benchmarks and tracker funds, in today’s low-yield world, the attractions of active fund managers are returning to favour. These and other factors are informing the debate around the future of emerging market indices, to the extent that voices in the investment world are seriously questioning whether they should even exist.
The world is so different from the 1980’s when emerging market indices first appeared, that they no longer reflect reality, nor do they serve the interests of investors. So where does this leave the GCC? And if the days of the emerging market index are numbered, what should companies do to protect themselves from any outflow of capital?
Fortunately, this would not be a sudden change. There is $1.6 trillion following the MSCI index, and that will take time to unwind. Furthermore, the reasons for the creation of the indices remain true: fast growing countries with young populations, well-managed capital markets and stable systems of government are a good bet for sustainable future growth. But change will come, and far-sighted GCC companies can take steps to position themselves for a new era. Benchmark indices will not disappear – but they are expected to change.
So what will the new measures and standards for inclusion be? In other words, what is the investor of the future going to look for? Many factors will drive the future of investing, including technology (artificial intelligence, the internet of things, fintech); global trade (commodities cycle, China’s return to growth, slowing developed markets); and climate change. These global themes are likely to be more of a driving force for investment allocation than emerging or frontier market status.
One term that will be heard more and more is Environmental, Social and Governance (ESG) benchmarks. This is the classification of companies judged by their environmental activities, corporate governance, social impact and other factors that measure a company’s record in these “softer” areas, rather than purely its financial performance. GCC companies can be sure that ESG will be a growing factor in investor decisions, and they can take immediate steps to focus on these factors in their operations. Whatever the future holds, one trend is rapidly becoming apparent: the term Emerging Market is no longer adequate to determine allocation strategies for sophisticated investors. Regional firms would be wise not to rely on it.
Oliver Schutzmann is founder and chief executive of Iridium Investor Relations, an advisory and technology firm
Results:
6.30pm: Handicap (Turf) | US$175,000 2,410m | Winner: Bin Battuta, Christophe Soumillon (jockey), Saeed bin Suroor (trainer)
7.05pm: UAE 1000 Guineas Trial Conditions (Dirt) | $100,000 | 1,400m | Winner: Al Hayette, Fabrice Veron, Ismail Mohammed
7.40pm: Handicap (T) | $145,000 | 1,000m | Winner: Faatinah, Jim Crowley, David Hayes
8.15pm: Dubawi Stakes Group 3 (D) | $200,000 | 1,200m | Winner: Raven’s Corner, Richard Mullen, Satish Seemar
8.50pm: Singspiel Stakes Group 3 (T) | $200,000 | 1,800m | Winner: Dream Castle, Christophe Soumillon, Saeed bin Suroor
9.25pm: Handicap (T) | $175,000 | 1,400m | Winner: Another Batt, Connor Beasley, George Scott
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
Yahya Al Ghassani's bio
Date of birth: April 18, 1998
Playing position: Winger
Clubs: 2015-2017 – Al Ahli Dubai; March-June 2018 – Paris FC; August – Al Wahda
Profile
Company name: Jaib
Started: January 2018
Co-founders: Fouad Jeryes and Sinan Taifour
Based: Jordan
Sector: FinTech
Total transactions: over $800,000 since January, 2018
Investors in Jaib's mother company Alpha Apps: Aramex and 500 Startups
Drivers’ championship standings after Singapore:
1. Lewis Hamilton, Mercedes - 263
2. Sebastian Vettel, Ferrari - 235
3. Valtteri Bottas, Mercedes - 212
4. Daniel Ricciardo, Red Bull - 162
5. Kimi Raikkonen, Ferrari - 138
6. Sergio Perez, Force India - 68
