Dubai - Nation benefits from safe-haven status, strategic position as a hub between Asia, Africa
Increased capital inflows from Middle East and North Africa and GCC markets help the UAE offset a decline in funds coming from emerging markets, particularly Russia, while the country remains the only net importer of private capital in the Gulf, a leading investment management company said on Monday.
Despite a drop in Russian capital inflows, the UAE, with its safe-haven status and strategic position as a hub between Asia and Africa, continues to be the main beneficiary of inflows of private capital into the GCC region, Invesco said in its Middle East Asset Management Study.
"An example of a rapid year-on-year reversal in sources of capital inflows is the decline in private capital coming into the UAE from emerging markets, including Russia. Last year's study showed inflows from emerging markets at 58 per cent, dropping down to 41 per cent this year. Flows from Russia in particular are thought to have been affected by the decline in the rouble reducing the buying power of affluent Russians in the UAE real estate and tourism sectors," said Nick Tolchard, head of Invesco Middle East. "This decline in Russian capital inflows may be cyclical given the strong and ongoing ties between Russia and the GCC," Tolchard said at a media roundtable.
"These findings underline the diversified nature of the UAE economy, especially with capital flowing increasingly from the Mena and the GCC. This could be transformational for the UAE given the longer term profile of GCC capital inflows and is a much more stable and sustainable source of capital than relying on negative events in international markets causing short-term capital flight," he said.
Tolchard said Saudi Arabia would benefit from increased private capital inflows, with the opening of the Tadawul to qualified foreign investors and potential IPO opportunities
"The opening of the Saudi Stock Exchange to foreign institutional investors in June 2015 has contributed significantly to the direction of private capital flows in the GCC region," the study said, based on 167 interviews with sovereign wealth funds, state pension funds, local insurance companies, family offices and banks across the region.
Invesco's 2014 study found the UAE, with its perceived "safe-haven" status and strategic position as a hub between Asia and Africa, to be the main beneficiary of inflows of private capital into the GCC region.
However, while the UAE remains popular, with 73 per cent of respondents saying that investable assets and people are in net inflow into the UAE (compared to 89 per cent last year), this year's study reveals a remarkable turnaround in the net respondent view scores on the direction of capital flow to Saudi Arabia, from -17 per cent last year to +61 per cent this year. "This is a significant finding in the context of low global oil prices and declining government surpluses in Saudi Arabia," it said.
Bahrain has also seen a notable turnaround in sentiment on capital flows, moving from a 73 per cent net negative view score last year to a positive score of 27 per cent for 2015.
The study pointed out that the primary driver of inflows in Saudi Arabia was positive perceptions of the economy and the opening of Saudi capital markets.
The opening of the Tadawul was eagerly anticipated by participants and seen by many as a first step towards market liberalisation and future reforms. Many expect this change to be a key driver of medium-term capital inflows, even if it would only have a relatively small impact on capital flow in the short term, said the report.
Stock market performance and opportunities to participate in IPOs were named as the second most-important drivers behind positive perceptions of capital inflows in Saudi Arabia. Respondents cited strong medium-term performance for the Saudi stock market and a relatively robust recovery to the market shock following the Opec's announcement on oil production levels in December 2014.
Last year saw some of the largest IPOs in the region, notably National Commerce Bank in Saudi Arabia and Emaar Malls in the UAE. The overall deal value for IPOs on the Saudi Arabia stock market rose significantly in 2014 and is approaching the levels seen in 2007 before the global financial crisis. "Some family businesses in the region now see an IPO as an excellent way to raise capital, improve governance and resolve succession planning issues in one go," said the study.
While things can change quickly in the Middle East, it will be interesting to see if positive sentiment amongst local, especially Saudi, investors translates into reality over the next 12 months and whether the anticipated effects of the opening of capital markets take hold," said Tolchard.