On the other side of the tower, managing director of Shuaa Asset Management Hassaim Arabi’s window looks out over another of Dubai’s iconic buildings, the Gate complex, a modernist version of the Arc de Triomphe that houses the stock exchange and marks the boundary of the Dubai International Financial Centre, the offshore regulatory zone that the Emirate hopes will seed a financial city to rival New York and London.
All along the Arabian Gulf, other Emirates and member states of the Gulf Cooperation Council (GCC) are making similar moves to diversify their economies away from hydrocarbons, mobilizing their vast wealth into construction and development projects and creating safe havens for international capital. While other markets struggle for liquidity, the Middle East is awash, and as local investors and sovereign wealth funds look for diversification and growth, they are flooding into emerging markets – locally and globally.
Three pillars
“If you want to look at the role that the GCC is going to play, 10, 15 years down the road, the vision is very much built on three pillars,” Mr Arabi says. “The first, and this is where people are prospering today, and equity markets are representing that, is organic growth.”
That organic growth is almost exclusively due to government spending, $1500bn (€955bn) of which is slated for investment in the region over the next five to seven years. It is also the factor which separates the GCC and wider Middle East North Africa (Mena) region from other emerging markets, according to Mr Arabi, whose company manages upwards of $1bn in the Arabian and Turkish markets. “Where you’re talking about other emerging economies, you’re talking about export-oriented economies,” he says. “Whereas the opposite is the case here. All the companies that you see listed are not computer manufacturers, they are not biotech engineering or anything like that. It is pure, plain vanilla cement, building materials, contracting, real estate, export services, shipping, banks and telecoms, but the bulk of their earnings stems from the government, from what you see around here,” he says, pointing to the construction sites.
Government spending eventually drips down to local businesses, which means that their stock market valuations are fairly well protected against unfavourable global economic conditions. This played out in the aftermath of the Russian and Asian crises and in 2001, says Mr Arabi.
By 2001, the Fed was cutting interest rates. Yet, the Arab world, the GCC in particular, bucked the trend in 2001, 2002, 2003, even 2004, until other emerging markets began to recover in 04, 05 and 06.
The reason for that, believes Mr Arabi, is government spending. “Even if you have a global economic slowdown, as long as the spending is there, it’s still going to trickle down into the corporate earnings, which means that it’s still going to be represented in share prices,” says Mr Arabi, who expects third and fourth quarter results to demonstrate that the GCC is still as well insulated as it was seven years ago.
It is when he begins to talk about the second and third pillars that Mr Arabi becomes more animated. “Pillar two is economic integration and the emergence of a mega-economic block,” he says. This begins with companies like Emaar, the Emirati construction business, using its domestic growth to expand and encompass investment opportunities in the wider Mena region, in Lebanon, Syria, Morocco and Tunisia. “So suddenly there is economic integration and money flowing that way in the form of FDIs (foreign direct investments). So what’s happening in the GCC is becoming an economic driver to non-GCC.”
Pillar three is a logical extension of pillar two. “By the same token, you’re starting to see that in Pakistan, in India and in China,” he says. With ever more capital heading for China and India, the third pillar is what Mr Arabi calls “repaving the old silk routes concept.”
Growing consumer and industrial spending in the Far East and India means a greater demand for infrastructure and financial services, which the GCC, and the Emirates in particular, hope to provide. This, in turn, will fuel more growth, leading to a virtuous cycle.
“Naturally, you will strategically position it where the demand is coming from. Especially, with all the sovereign wealth funds being looked at as a taboo in the West, they’re speeding up the silk route because that money’s going to find its way into Asia. The Industrial & Commercial Bank of China is a very good example. The Qatar Investment Authority and the Kuwait Investment Authority are the biggest strategic investors there,” Mr Arabi says.
“What that means is that you’re funding, not only primary and secondary markets, but you’re funding the growth of Asia. That will allow for more domestic growth in Asia, and that becomes this circular integration.
“One day, 15 years down the road, the geopolitics of the whole region will be affected by that. These are the nations and the super-economies that are emerging, the GCC being one of those, and a pillar of that greater Asia vision, if you like. That’s something I truly believe in.”
The creation of a global centre for finance is indeed a grand vision, but the redistribution of local money cross-borders is an economic imperative for those thinking on a more prosaic level. While the sovereign investors make headlines, there remains a large pool of institutional and quasi-private capital that was repatriated following the terrorist attacks in New York in September 2001. The most lucrative of the available asset classes was property, and many investors rapidly became highly concentrated. Local asset managers, riding the boom, were promising returns of upwards of 25 per cent, and often achieving them. Risk management and diversification did not make it onto the agenda.
“It has been a concern,” says Dr Humayon Dar, CEO of BMB Islamic, which advises on Sharia Investments. “Many investors are not financially sophisticated – they look for the returns. When it comes to the complete risk-return profile of the product, many investors are not fully informed, and hence they do not take fully informed decisions. Many investors have made very quick bucks by investing in real estate, by investing in some other infrastructure products.” Some form of diversification is now taking place, but the local market simply does not offer the opportunities.
“Quite a number of private equity funds, for example, are raising money from the region, but investing elsewhere, and it happens to be the case that many of them are investing in India, they are investing in China, they are investing in Sudan, they are investing in Morocco and in other North African countries,” Dr Dar says.
“This is an emerging trend, because of the close cultural links between the GCC region and the North African region. The investors find it culturally acceptable to go into those countries. If you go to Morocco, Algeria, and Tunisia, they are happy to welcome their fellow Arabs from a rich region like the GCC.”
Overseas investments
Rami Bourgi, head of emerging markets for Société Générale Securities Services (SGSS) concurs. “There is indigenous wealth [in the GCC], the highest per capita in the world, but the population is very small. So, the GCC investors are shrewd, and they realise that local opportunities are not enough. There is excessive wealth to go beyond local opportunities. So, it’s inevitable that they will go overseas. It’s the oil money which counts in the GCC, it’s the population and the investment opportunities which count in the other countries.”
What North Africa, particularly Morocco and Egypt offer, is large, liquid markets and, crucially, large populations – more than 33m and 80m respectively. A young, aspirational middle class and rising consumer demand makes them strong growth markets. Egypt has benefited from having no restrictions on portfolio trading or foreign ownership and from the modernisation of the Cairo and Alexandria Stock Exchange.
Furthermore, the depository is, according to Mr Bourgi, now up to developed market standards. “It’s nice when you go into an emerging market and then you find the infrastructure is that of a mature market. It’s win-win,” he says. The state of infrastructure in other countries, including those in the GCC, remains in flux, although Dubai has put in place a state-of-the-art exchange using international vendor systems.
SGSS’ French heritage has given it a foothold in former colonies, such as Morocco and Algeria, and these francophone nations are now benefiting from their more recent historic links with Europe, according to Amr Seif, portfolio manager at Investec Asset Management. “As French speaking nations they become a good pool for outsourcing services to French speaking Europe. So, Belgium, France, Switzerland, Luxembourg, etc, all the French speaking countries use them for some services that do not require physical presence,” he says.
Morocco does, however, remain principally an agricultural economy. “Usually the crop will be the barometer of how the economic growth and development is. For the past few years Morocco has been having pretty decent GDP growth, north of five per cent. This year’s expected to be between three and five and they’ve had a decent crop,” Mr Seif says.
The other emerging sectors there would be familiar to GCC investors. “The main sectors that would lead the growth in Morocco are probably construction and building materials, given that the government is also committed into building low income housing to solve a social problem that’s been there in Morocco for a long time,” Mr Seif says. “And of course, at the back of that, there is a banking sector that has to be involved in most of these transactions as a financial facilitator.”
Once again, however, there is a question over correlations between this and investment back home, particularly surrounding the cost of importing construction materials and the presence of GCC companies at the forefront of development and reconstruction projects.
Furthermore, Mr Seif warns, “The stock market in Morocco is structurally expensive, or the valuations there are pretty stretched, simply because they prohibit the exportation of capital and big portion of the wealth, whether it’s pension funds or mutual funds, or savings in general, go to the local market.”
Opportunities in Saudi
For all the talk of population restrictions and focused economies in the GCC, there is one country in the Gulf which is consistently ignored by investors.
 | “People talk about GCC but mainly focus on Kuwait, Bahrain, Dubai, but Saudi Arabia is not always included in what they describe,” says Gilles Glicenstein, CEO of BNP Paribas Asset Management. With a population of around 28m and by far the largest stock market capitalization, he adds, “[Saudi] could really represent three-quarters of the wealth and population of the region, and it is a very active country with a lot of projects, a lot of investments.” |
BNP Paribas recently signed a joint venture with the Saudi Arabia Investment Bank to manufacture and distribute investment products. The new company, Saib Asset Management, will have $2.2bn in assets under management. The problem is, Saudi Arabia has strictures on foreign ownership and forbids portfolio investing in its markets, which means that it is often off-limits for traditional investors, even those within the GCC.
This could all change. The Kingdom has been showing signs of opening up and this year broke ground on its own financial centre, the King Abdullah Economic City. “There is clearly a will to develop investment skills, to open up to worldwide investments, but on the other hand, Saudi Arabia clearly wants to do it its own way, which is not some sort of big bang,” Mr Glicenstein says. “They are very anxious to modernise their approach. The country wants to be included in all that demand that comes from the rest of the world. As far as I can tell, Saudi Arabia is not willing to open at any price; they want to have a very serious regulatory environment for newcomers. So it's tougher than some of the other Gulf States.”
For Mr Glicenstein and BNP, a presence and a reputation in Saudi unlocks a lot more than simply the domestic market, but also gives the company access into the hard-to-penetrate Islamic finance markets of South East Asia. Interrelation between Saudi, the wider GCC and India is likely to form a major part of the strategy in the future – Mr Arabi’s third pillar.
“[For emerging markets investment] There is no necessity to go through Europe or a developed country any country with a more mature market. There is a point-to-point model, where emerging countries like to invest in other emerging countries,” he says.
That the GCC, and the United Arab Emirates in particular, is going through a period of enormous growth, is undeniable. Dubai’s skyline is ragged with the skeletons of skyscrapers under construction and the roads are jammed with traffic. But for some, growth remains their biggest concern – though property sells out in hours, concerns over spiraling inflation and unrest amongst the labourers building the dream suggest that these are economies outgrowing themselves. The fact remains though, that if the governments are able to spend their $1500bn wisely, and fulfill just a fragment of their ambition, then it is possible that the new Silk Route to China will not be as snarled and inefficient as Dubai’s Sheikh Zayed Road.
