Asia and the GCC find wealth of opportunity in aftermath of crises

Category: Asia, Japan, Middle East, Singapore, Global, Qatar, Europe
By Toby Garrod

Experts from both regions must engage to facilitate investment expansion

Financial institutions in Asia and the Middle East are assessing the new opportunities coughed up by the new economic world order as global markets try to move on from the successive crises in the US, Europe and the Middle East.

Market leaders attending Asia Asset Management’s CEO Luncheon Forum in Singapore, hosted by the Qatar Financial Centre Authority (QFC Authority), noted that while opportunities relating to Europe are rooted in the profound sense of uncertainty that exists in the market, the Middle East looks set to flourish, based both on fundamental improvements and structural shifts in the global economy toward emerging nations – especially those in Asia. However, excess liquidity there will remain on the path of least resistance, toward the West, unless Asian institutions make a move.

The enduring European sovereign debt crisis is underscoring the capacity of the Asia financial markets to weather uncertainty and move forward, says Manraj Sekhon, CEO of Fullerton Fund Management Company.

“At the bank level, the deleveraging of European banks has certainly impacted Asia. But the fact is that Asian banks have very strong balance sheets right now, which means that they are able to move through this point. Nevertheless, there is a dislocation going on. We haven’t reached a stage where the European banks have pulled out in a significant way, but we are aware of the possibility, and that has been priced into the market to some degree. I think the authorities and central banks, certainly in Singapore, are aware of that. In terms of project and trade finance, they will definitely be aware of that,” Mr. Sekhon says.

Meanwhile, concerns are raised that a lost generation in Europe may be matched by another in the Middle East. 

“I think that in Europe we are looking at something of a lost generation, when I see university graduates on the street begging for money. Clearly we are not going to be decoupled from the impact of what has happened in the eurozone. But I think this also represents quite a remarkable opportunity,” says Noripah Kamso, chief executive of CIMB-Principal Islamic Asset Management. “There has been quite a lot of requests from the corporates on the origination side, for instance in regard to Islamic investments. Sukuk issuance is now clearly seen as an alternative. The banks in the eurozone are currently betting on improving their corporate balance sheets either by deleveraging or by not lending. And quite a number of banks are not lending. So we are thinking of pushing them to do sukuk because they are actually very short on these products in those markets.”

Given the close trade ties that exist between Europe and the Middle East, there has of course been some outflow of negatives.

Shashank Srivastava, CEO of the QFC Authority: “Well, finding a solution to the crisis essentially means a managed default. From the point of view of Middle Eastern countries, the crisis will impact them in two or three ways. One, which is the main concern, is about hydrocarbons, which will obviously have an effect on many countries in the Middle East. Clearly Bahrain and Oman are extremely close to fiscal deficits since the crisis. I know for certain that we send more of our gas and hydrocarbons east of Qatar, to Asia, than west of Qatar. So, that’s reassuring to a certain extent. But there is still a risk of a synchronized global slowdown as the exporting countries of Asia are severely affected by the European crisis and US pressures, which impacts demand and thus pricing of hydrocarbons. As such, hydrocarbons should be watched closely.”

But while the fallout from the eurozone woes is not to be underestimated, it is the Arab Spring that poses the greatest challenge to regional economic security. Fortunately tensions have eased.

“Going through the countries, even Bahrain has calmed down a fair bit,” says Yu Iwata, head of strategic initiatives at Nikko Asset Management. “I don’t see any problems per se with the other countries, so I do think it has calmed down a lot. Oil price has been a concern for exporters. But as regional concerns ease, so does the oil price, which is easing inflation pressure, and helping economic development, clearly benefitting Asia growth and stability.”

“In general, business confidence is quite good,” says Mr. Srivastava. “We conduct a business confidence survey of Qatar every quarter. The results show a significant dip in 2009-2010, but the level has been consistently optimistic since then. Business and financial institutions seem quite confident overall.”

“Then of course you have the Libor issue, looking at investor mood and confidence. Obviously, that has had a major impact and performance of stocks has not been as strong,” says Mr. Srivastava. “Although, in general, business confidence is quite good. We conduct a business confidence survey of Qatar every quarter. The results show a significant dip in 2009-2010, but the level has been consistently optimistic since then. Business and financial institutions seem quite confident overall.”

“In Qatar’s case, GDP growth has on average been close to 14%” he notes. “Clearly this is not sustainable, however. Such gains have been achieved largely due to the increase in the LNG production, high hydrocarbon prices and the headway they have made in utilizing and marketing associated products including gas to liquids (GTL) and natural gas liquids (NGL) projects as well as downstream processes such as petrochemicals & fertilizers. However, there is a freeze on further hydrocarbon projects till 2015. But they are the largest exporter of liquid natural gas in the world, and they can keep extracting for the next 200 years. So, yes, you will see a slackening in GDP growth, from 14-15% downward, but to what level, we don’t know yet. The IMF estimates it’s going to be around 6.5-7.5%. My guess is that we are going to beat those estimates because we have very ambitious spending plans ahead of the World Cup, which will drive non-oil sector growth alongside financial services, trade and tourism.”

Trade statistics reveal a startling shift in export trends that neatly capture the recent changes in global economic power. Statistics suggest that the portion of exports to Asia from the Middle East and North Africa that comprises non-oil products rose from 14% in 1998 to 25% in 2008. Meanwhile, the Gulf Cooperation Council (GCC) sent less than 15% of their non-oil exports to the EU and the US in 2008.

“We are seeing increasing linkages to Asia on both the oil and non-oil sides. And I know for sure that the investment flows are following those trade linkages, says Mr. Srivastava. “China apparently imports about 58% of its oil and gas needs from GCC countries, and that is set to hit 70% by 2018. So the linkages are growing.”

As the crises in the Middle East cool off, market players have been quick to find investment opportunities amid the debris.

“There seem to be certain centres benefitting from the short-term flows,” says Maznah Mahbob, chief executive officer of AmInvestment Management. “It seems as if certain areas actually become collection centres for refugees when there is unrest in the region, such as in Syria or Egypt. There have certainly been inflows of cash into Dubai and in Abu Dhabi.”

With this, speculation is rising about the status of the capital.

“It is hot money. This is not the first time we have seen these types of flows. In fact, it is the third,” asserts Mr. Srivastava. “The first was after 9-11 when all the Middle Eastern money started coming back into the region and the second was when the Americans tightened the screws on Switzerland. It moves out just as quickly as it moves in, because in our part of the world there is not enough investment opportunity to absorb that amount of money.”

The shifting of capital from pillar to post as a result of the crises in the Middle East has created uncertainty, from which the level headed have managed to benefit.

“Politically, we were unsure looking at the region, which countries were most at risk,” says Kong Siew Cheong, chief marketing officer at Lion Global Investors. “Some were saying Bahrain, others were saying other places. There were flights of capital back into places like Abu Dhabi and Dubai, and suddenly you have the whole Dubai crisis where a lot of people pulled out of the economy at one point. There are a lot of good opportunities as rates are high, currently. We have been looking at bonds to buy for our insurance company division. To be fair, we were running away from Middle Eastern bonds two years ago. But now we have discovered some very good value in some of the yields. Abu Dhabi and Dubai can both give you some very good names, and some prudent pickups.

A similar view resonates from Japan.

“We think the Middle East turbulence is going to continue for some time, as with the European crisis,” says Genichi Tsuzawa, managing director of DIAM Singapore. “Meanwhile, I find the fundamentals of the GCC countries quite good, so when this situation changes from being supply-demand driven to being fundamentally driven, I’m sure the money will increasingly start to flow into these areas. The prospects are quite good.”

The other side of the coin in this roundtable discussion is concerned with the enormous pools of wealth and capital that are building up in the GCC, the deployment of which is becoming increasingly important in the coming stages of global economic development.

“Just this year, Qatar has deployed about US$30 billion, and every single year capital continues to accumulate,” says Mr. Srivastava. “The domestic market is limited, so they need to go offshore. Since the start of the year, we have been most heavily invested in the West. There is rebalancing happening, but it is happening slowly. Well over 50% of QIA funds remain in the West and this pattern is likely to be seen among sovereign wealth funds across the region. Some tend to be more active in rebalancing their portfolios than others, such as Kuwait and Abu Dhabi. The Qatar Investment Authority (QIA) is extremely active.”

And fortunately for Asia, the East is making increasing financial sense as an investment destination. At least to those in the know.

“The QIA said it was looking at about $10 billion just in India,” says Mr. Sekhon. “It’s hard to speak for the GCC as a whole on this issue. The QIA is a very different animal from its Kuwaiti counterpart, for instance. I think the market perception has been that Kuwaitis have been much more conservative in their allocations historically, even in regard to the West. They have been much more low-risk, fixed-income, which dominates their portfolios. While the QIA, which is much more optimistic, much more direct, appears to be making investments with a stronger return profile rather than a liability management objective.”

“Our observations are similar to Mr. Srivastava’s,” Mr. Sekhon adds, “In that there is a lot of thought going on in the Middle East about rebalancing, but there has been very little action. And that is understandable, as it involves taking money away from Europe and indeed the US, perhaps not at the most opportune time and deploying it elsewhere. The large sovereign wealth funds and government institutions have significant pools of money and are all seeking to rebalance, but it’s likely to be a multi-year trend, and it is not something we are going to see happen very quickly.

“I think the onus is on us, as much as it is on them, as asset management institutions and institutions generally, to engage them and actually show them the opportunities that perhaps they are not fully appraised of. They know about Asian equities, China opportunities, and perhaps real estate across the region, but beyond that there’s not a huge amount of understanding of the opportunities in Asia. The credit market is a good example of something that the institutions in the Middle East could be very interested in. Their depth of understanding is not as high as we would like right now.”
Such views saw strong support from the QFC Authority.

“Absolutely,” responds Mr. Srivastava. “This is the basic reason why we come to Asia. Exactly what they [GCC financial institutions] need is information from Asian experts about the opportunities available. The onus really does lie on Asian asset managers to engage. You know the appetite is there and you know they generally don’t have the depth of understanding of the Asian market. For all their rebalancing efforts, what happens is that the money goes West and then comes back East again. Their advisors are sitting in Zurich, Geneva or London, and I don’t think they have as much experience of the Asian markets as investment managers based in Asia do.”

The QFC Authority’s CEO goes on to highlight what is expected of fund managers as they move into the region: “While there are certainly Western bankers walking in thinking they’re going to make piles of money, it’s not really about that here. It’s about good business and relationships. It’s not Europe, it’s not the US. So what we have seen is that there is a case for trying to find local [Middle Eastern] talent, which is very difficult. But for companies that do make that effort, it does open up a lot of doors. It’s old-fashioned networking. You have to invest in the local talent, with the guy that knows how to sit down with the Sheik, and so on and so forth.”

With this in mind, our panel of Asian participants reveals the measures they have been taking to court such business through distribution networks.

“We are working with various third party partners,” says Ms. Masnah. “We don’t have to chase them too much, which I think is a result of the current economic climate. A lot of the big houses seem to have downsized, which has brought out a lot of good people with very good contacts in the institutional space, in the high net worth space, including former private bankers, a lot of these people are setting up their own shop, so to speak, and sourcing for providers. So it looks as if it’s an emerging business model, and that is very good because they are proactive, supposedly going all out because it is their own business.”

She continues: “As long as they can source very good investment products then they will promote it. It’s win-win. Before, it was harder because we have very fussy shareholders regarding bottom lines, especially in Asia. They are very prudent and they don’t like this bottomless pit of investment. So if we can get a win-win way, then all we need do is focus on the value of the positions and the deliverables. If our product can stand the local competitiveness, and we have a good partner who already has such relationships, we hope that we can all benefit.”

While it is surely important to know how to sit down with the sheikh, first you have to get invited to his table, and that may require Asian fund managers to overcome some fairly significant perception problems.

“Although we haven’t employed any blue-eyed blondes,” says Mr. Sekhon, “I can see why some perceptions remain in place in the Middle East and other parts of the world regarding Asian managers. The onus goes back to us to engage properly and do whatever we feel is most effective. It goes back to branding. A lot of brands in the West are somewhat tainted by what has happened in the last few years, whether it’s in the investment banking world or the fund management world, and pools of money in the Middle East are looking for new rays of light and they could come from this side of the world.”

He continues: “It’s time for us to say ‘listen, there are alternatives on this side of the world, whether it’s fixed income or equities’, and this is our opportunity to build track records and brands in their eyes. There are no shortcuts and I think the Middle East is a good example. You really have to build relationships, and build structured brands that can establish a presence through performance and strong products. It’s not about any bias towards the West or East.”

As important as it is for Asian financial institutions to work on earning respect and building credibility in the Middle East, the Middle East must also prove itself a worthy target for investment.

“I have a question for Mr. Srivastava about the long-term development of the GCC and the Middle East, which is really about corporate governance,” says Mr. Sekhon. “As you build up the Qatar Financial Centre and other entities in the Gulf and Middle East build up their financial services industries, it seems to me that the one thing that the Middle East and Gulf is not short of is capital. So providers of capital, such as us turning up and saying ‘how do you make your money?, how do you run your business?, how do you like to invest?’ don’t feature high on their priority list. But as you move forward with the financial centre and other similar developments in the Gulf, ensuring the development of the equity markets and the credit markets, and as standards of corporate governance converge with whatever the right standard is globally, it has to be central to that to ensure that there is a very even development of the financial centre. How big is that challenge?”

“It’s a huge challenge,” responds the QFC Authority’s CEO. “I completely agree with you. It was a challenge we faced in Dubai when we were setting up the Dubai International Financial Centre and it is a challenge that continues to exist around the GCC countries. It is the biggest challenge in the biggest market, which is Saudi. They don’t need the money. From a corporate governance point of view, I think that Qatar is much more serious than anyone else. The hope is that QFC financial standards will become the financial standards for the entire region’s financial industry. However, it’s not just the QFC financial advisory, it is also relative to the stock market. Importantly, NYSE Euronext actually put in the management for the exchange. And the reason that anyone would want to do something like that is to try to capture those elements of corporate governance. Qatar is the only one in the region that is thinking of doing things like this, and it is up to us to drive the programme region-wide.”