UAE has become an ‘investment nirvana’: Emirates NBD Asset Management on growth in the region

Transcript

Official data shows that the United Arab Emirates’ economy has turned around with a strong rebound in profitability and growth. World Finance speaks to David Marshall, Senior Executive Officer at Emirates NBD Asset Management, to discuss how the financial services industry, focusing on asset management, is growing in the region and beyond.

World Finance: Well David, Emirates NBD Asset Management is the largest banking group in the UAE in terms of assets, so what does the investment landscape in the region look like?

David Marshall: To answer that I would probably go back about three years, when dock markets and bond prices were really depressed after the global financial crisis. Then obviously we had the Arab Spring, which further depressed prices.

At the backdrop of that of course, economic growth was coming through; the green shoots were coming through. Government finances were improving, corporate profitability was improving, and we were starting to see strong performance. So you had that kind of investment nirvana, strong growth, strong performance and cheap prices.

[W]e’ve seen a re-rating that’s attracted investors’ interest

Since then 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 last year, with the upgrade from Frontier to MSCI status of the UAE in Qatar. And that really forced international investors from being interested, to making significant allocations.

On the debt side, we’ve seen a real improvement on the debt prices. Borrowers were really shut out of lending from traditional sources, which was the banking sector in the Middle East. So since then they’ve tapped the capital markets. You had really attractive borrowers looking to raise money at attractive yields, and again there’s been a re-rating there. So we’ve seen, since the crisis, CES coming from around the 940/950 levels down to 150 today.

World Finance: What investment trends are prominent in the region?

David Marshall: The most obvious one I guess would be in financial services, where we are seeing a continuation of the recovery. Again like most parts of the world, banks were under strain after 2008-9; balance sheets were largely impaired. You had loan-to-deposit ratios in some cases of up to 130 percent, so you had 130 percent of loans and only 100 percent of liability. So that was clearly going to inhibit loan growth.

Obviously some of those loans also went bad, so you had provisioning and impairments. Now we are moving through that cycle, so you are seeing underlying operating profits are very very strong. We think that will therefore come through when provisioning stops, which we think will happen probably sometime in the second half of 2015.

Geographically I think there are some interesting trends as well. Countries like Egypt, which obviously has been under political and social strain. Economically we think that’s going to move through. We’ve got the elections that have just been completed. We think that’s going to put confidence back into the region, and we expect foreign direct investment to improve; that will spur CAPEX and investment.

So we started making investments there last year defensively: utilities, and telecom companies. Now we are moving to play cyclical, so construction, real estate, and more investment banking themes. The big one I guess though would be Saudi. 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. I think if that opens up that would again spur huge foreign investor interest.

World Finance: Well sharia-compliant investing is becoming prominent worldwide – how are you responding to this?

David Marshall: For us it’s always been a really big part of our business. About 30 percent of our assets are run on a sharia-compliant basis, so north of USD 700m of our USD 2.5bn we run is Islamic. We’re seeing people starting to tap into that. Even the UK government look into issuing a sukuk, they are looking to tap 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 – they have sharia-compliant products and services that are a key part of that.

From an investor base, what we’re seeing is a lot of interest in sukuk – very very attractive asset class, which can sit on the balance sheets and clip out income – so it can optimise balance sheets, sharia-compliant real estate and cash.

World Finance: The Middle East has traditionally been an exporter of capital of the world – do you see similar interest in MENA investments from your international clients?

David Marshall: I think that’s changed again, dramatically in the last 18 months. Three years ago we were peaking to international investors about allocating to the region.

We are seeing sovereign wealth fund interest incoming to the region

As I mentioned stock prices were depressed, we thought it was a great entry point. 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 seeing sovereign wealth fund interest incoming to the region.

We are also seeing the emerging market asset allocators having to buy now, because of that upgrade that I mentioned earlier. I think on a macro-level there are also reasons why investors are interested in the region. If you look, emerging markets have really been in the doldrums for the last year to two years. And that has been 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.

World Finance: What trends to do you see impacting the asset management industry in the coming years, and with tighter regulation – how do you see that impacting the industry?

David Marshall: Regulation is an increasing part of what we do. There are some trends that I think are going to help us. We are seeing trends towards outsourcing. We are seeing companies who have sat on assets for years maybe on the balance sheet, and are now outsourcing that to a professional manager. That’s a great thing for us obviously; we want to capture some of that.

But from the regulation type, you can’t escape it. You know, we have a regulator in Dubai, we have one in Jersey where we have a fund base, we have one in Luxembourg; anywhere we want to sell funds we have to get approval from a host regulator. You can’t get round that.

Regulators are increasing the capital requirement to make sure that the financial service providers themselves are strong. That of course is leading to consolidation in our market, both in insurance sector, banking sector and asset management sector. So as we have seen probably in the UK and Europe, I think the smaller businesses will probably be consolidated or merged with some of their counter parts.

World Finance: Well finally, how are you positioning your business in the future?

David Marshall: We have grown our assets by about 100 percent in the last two years. For me it’s less about the amount we have grown; it’s about the way we have grown.

We have grown our assets by about 100 percent in the last two years

We are looking to diversify our product range, we are looking to make sure that we reduce on the cyclicality of the shareholder, and for our investors. So we can offer products from real estate to fixed-income liquid equities; that’s what I want to do.

I want to achieve a diversified product set. Also, I want to broaden our investor base. The market there was very strong on a wholesale basis. I see a lot of growth in institutional investors. So you are seeing pension funds, regional and international. We have seen a growth in the civil service allocation, banks looking to allocate as well.

Finally, that international flavour. For me, it’s largely untapped. We have only just begun that process. We have just launched our platform in Luxembourg, which was last year; we are looking to expand that aggressively. So as we move to Europe, Asia and perhaps even further afield, I think that’s where we’ll see strong growth in the future.

World Finance: David, thank you.

David Marshall: Thank you.