Official data shows that the United Arab Emirates’ economy has turned around after years of low growth, financing issues and restructuring post-2009. Now, the Emirates is seeing a strong rebound in profitability and growth as it continues to benefit from its perceived safe-haven status amid regional instability.

The economic recovery has been solid, supported by the tourism and hospitality sectors, and a rebounding real estate sector in particular. What’s more, infrastructure and growing wealth has fostered a growing financial industry in key hubs such as Dubai and Abu Dhabi. Public projects in Abu Dhabi and buoyant growth in Dubai’s service sectors have continued to underpin growth, which reached 5.2 percent in 2013. Now, the macroeconomic outlook from the IMF, expects a 4.8 percent growth in 2014 and approximately 4.5 percent in coming years, supported by a number of government-led mega projects and the successful bid for the World Expo 2020.

Crucially, the UAE growth is increasingly supported by non-oil activity, which remains a robust source of income as the local economies wait for oil production to stabilise. In particular, construction and retail trade will continue to drive economic activity, supported by high levels of public infrastructure spending and strong private sector credit. In addition, oil production is expected to rise owing to strengthening global demand, challenges in restoring oil production in non-UAE countries such as Libya, and a decline in global oil inventories. Recent analysis from the IMF also revealed projections for the production of 2.8 million barrels of oil per day in the UAE during 2014 (see Fig. 1). This positive outlook for the current economic state in the UAE has bolstered financial services in the region, which have picked up significantly following the drop in markets post-crisis and after the Arab Spring, which drove down bond prices.

Now, major players such as Emirates NBD Asset Management (ENDB) are looking positively on the investment landscape in the region.

“We’ve seen a re-rating that’s attracted investors’ interest; a lot of international investors are now interested in the region. For me the game changer was of course the upgrade from Frontier to MSCI status of the UAE and Qatar this year. This really forced international investors from just being interested, to making significant allocations,” says David Marshall, Senior Executive Officer at ENDB.

“On the fixed income side, we’ve seen a real improvement in spreads. Borrowers were somewhat shut out of traditional lending sources – namely banks in the Middle East. So since then they’ve tapped the capital markets. We have seen really interesting issuers looking to raise money at attractive yields, and again there’s been a re-rating there. So we’ve seen, since the crisis, CDS levels coming from around the 940/950 levels down to 150 today.”

Financial services boost
The UAE officially transitioned from being considered a frontier market to emerging on a key MSCI market index in June 2014, which marked a new era of both greater opportunity and closer scrutiny for the financial markets. Since the announcement in 2013, stocks across the UAE have 89 percent over the last year as of June, while capital markets in Dubai are starting to draw more attention from foreign investors.

Being listed on the emerging markets index, UAE companies are joining firms from Brazil, China and more than 20 other markets across the globe. In particular, several Dubai-listed financial firms have benefited from this and seen their stocks soar as a result. In this respect, investments in financial services are a growing trend in the UAE as the economy continues to recover. Like most parts of the world, banks were under strain after 2008-2009 and balance sheets were largely impaired, with loan-to-deposit ratios in some cases of up to 130 percent and thereby inhibiting loan growth. When some of these loans defaulted, local firms endured provisioning and impairments, but having moved past this part of the economic cycles, players like ENBD are seeing very strong underlying profits and a renewed faith in the Arab region.

Foreign interests
“Geographically I think there are some interesting trends. Countries like Egypt, which obviously has been under political and social strain, now looks attractive from an economic point of view, with elections having just taken place. We think that’s going to put confidence back into the region, and we expect foreign direct investment to improve, which will spur capital expenditure and investment,” says Marshall.

“Last year, we started making investments there defensively: utilities, and telecom companies. Now we are moving to play the cyclical story, so construction, real estate, and more investment banking themes. The big game changer will be Saudi Arabia though. That’s the untapped market, the one that all investors want to get into. It’s still expensive; you can only do it through derivatives or indirect access. The recent announcement that the market will open up to foreigners will have a huge impact once this happens, with likely strong foreign investor participation and possible inclusion to various indices.” In this respect, the IMF projected that foreign direct investment will reach almost AED44bn (approximately $12bn) in 2014.

A key part of this growth will be driven by an expansion in non-oil sectors namely manufacturing, construction, tourism, trade, transport, and logistics. Conversely, the Middle East has traditionally been an exporter of capital of the world, however, now the financial industry is seeing a growing interest in MENA investments from international clients. This follows a period of bearish investments, after the market peaked three years ago along with the depression on regional stock prices. Since then, flows dropped as investors considered the risk. But now, 2014 has been a bullish MENA year.

“To be frank they weren’t ready; we were too early. I think there was too much investment risk for them, there was too much business risk and I think possibly at the individual level, too much personal risk. So they weren’t ready to allocate then, but I think they are very much ready to allocate now. We are also seeing sovereign wealth fund interest in coming to the region,” explains Marshall.

“I think on a macro-level there are also reasons why investors are interested in the region. If you look at recent trends, emerging markets have really been in the doldrums for the last couple of years, driven by currency weakness, weak fiscal and current accounts on the side of the governments, and really slow growth. We don’t have any of those problems in the Middle East. We have largely dollar-pegged assets. We have strong growth driven by a high oil price. And that is really going to make a nice diversification play for those emerging market managers.”

Islamic investments
Another key driver for ENBD’s marked growth, is the increasing popularity of sharia-compliant investing, which has become a prominent part of global portfolios. For ENBD, one of the UAE’s largest asset managers, Islamic banking has always been a major focus for the business, with about 30 percent of assets run on a sharia-compliant basis. This amounts to more than $700m of the firms total $2.6bn in assets, invested in Islamic products.

“We’re seeing people starting to tap into sharia-compliant investing. Even the UK government is looking into issuing a sukuk, in order to tap into that investor base. For me, it’s all about investor demand. We’re in the Middle East – if you want to attract assets from say Saudi, UAE, Oman – even further afield like Malaysia or Brunei – we have sharia-compliant products and services that are a key part of that. What we’re seeing is a lot of interest in sukuk – a very attractive asset class, which can sit on the balance sheets and clip out income, thus helping to optimise balance sheets. In addition there is strong demand for sharia-compliant real estate solutions as well as money market products,” says Marshall.

On that basis, ENBD has grown its assets by approximately 100 percent in the last two years. A key driver in this has been the diversification of its product range, which Marshall insists is a trend that will continue along with a reduction in the dependence on cyclical issues.

“I want to achieve a diversified product set, so we can offer products from real estate to fixed-income to liquid equities. Also, I want to broaden our investor base. The wholesale market is very strong and I see a lot of growth in institutional investors,” he explains.

Finally, the firm is working hard at gaining an international flavour, which can diversify its business portfolio even further. Having recently launched a platform in Luxembourg for its fund range, ENBD Asset Management is looking to expand aggressively and is betting on strong growth in Europe and Asia that can sustain further asset increases in the years to come.