Inflection point

By Nick Tolchard, head of Invesco Middle East

3 Jan 2012

Distinct themes to the asset management industry in the GCC region have been uncovered over the past two years. These include short-time horizons, an expectation of high levels of return (particularly among those investing on behalf of very or ultra-high-net-worth families), a bias to home markets and an willingness to take risk.

There is significant variation between investors in different countries, and we find a correlation between wealth levels and return expectations. One notable trend was that we were reaching an inflection point where money was starting to be invested longer term, and the upheavals of the Arab Spring were  perceived as less important than playing global markets.

The GCC industry has been relatively unchanged by the Arab Spring as the status quo has been generally maintained. The main unrest is a broader Mena geopolitical issue, so what effect have this year’s upheavals had on regional asset management?

I have just returned from a visit to Egypt to assess the future opportunities for asset management. Egypt is a classic litmus test for the evolution that could be unlocked as highly centralised states look to change to democratic economies. Why? Firstly, it has a large and growing population of 85 million people, it’s not a city-state. Secondly, there is a well established banking and financial sector (which, let’s remember, was the main financial centre of the Middle East for most of the 20th century). And thirdly, there is already a large and entrepreneurial middle class.

One of the main challenges for the Egyptian economy is the size of the budget deficit. In order to drive forward reform, the new government (when elected over the coming months) will need to raise international funding (which needs to be politically acceptable to its electorate) and at a time of global liquidity constraints.

The issue that affects the development of asset management in Egypt is that much of the budget deficit has been caused by years of state subsidies, often to the middle class who are the usual targets for sales of investment products, and who will therefore need to re-budget their households en masse as the country pays its way out of debt. Another main factor governing the development of the asset management industry is the available infrastructure, i.e. the nature and scope of regulation.

Naturally, at a post-revolution time, the financial services sector is likely to be prioritised at some later date.  A third factor is the wealth management of high-net-worth individuals. Clearly, much will have been internationally privately banked over the past few years, and it may be some time before capital flows return.

So is there any opportunity? Global wealth management organisations are well placed and are able to take a longterm view. With 70% of the population aged under 30 (that’s 50 million) there is a significant future market, which the global brands will target as they build their footprint across the developing region.

The key to developing a sustainable industry that meets the needs and expectations of future savers and investors will be to offer products that are long-term, international, and where risk is better understood, and that is where the global organisations can play a part. Often much focus is made on the development of local financial institutions, but experience elsewhere suggests that it’s easier to import a fit for purpose industry. The extent to which the new order that will develop in Mena over the coming decade embraces the expertise available in international organisations and the world’s leading financial centres, will be a key determinant of their populations’ future financial security.