Markaz Panel debates challenges for Institutional Wealth Management in 2008

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Markaz Panel debates challenges for Institutional Wealth Management in 2008 21 - Jan - 2008

The future of global growth and the challenges faced by GCC countries became the most important part of the closed door discussion organized lately by Kuwait Financial Centre “Markaz” in Kuwait. Apart from senior executives of Markaz, the panel comprised senior executives drawn from Mckinsey, Standard Chartered Bank, Credit Agricole, Investec, OPEC, Qatar Financial Center Regulatory Authority, Beltone Financial, MIBC, & Ask Investment Managers (India). The event was moderated by Mr. Richard Banks, Euromoney Conferences. The highlights of the panel are mentioned below, whereas the full report and video are available for downloading on Markaz.com/panel The event began with Manaf Al-Hajeri, General Manager- Markaz, welcoming the panel members from various reputed organizations globally for the panel discussion and a short presentation on “New frontiers of institutional asset management” and “Asset outlook for 2008” by M.R. Raghu, Head of Research- Markaz. The event was well timed as the global scenario had never been as complex as it is at present. On one end, the Emerging markets have witnessed the seventh consecutive year of out performance and, on the other; the sub-prime issue continues to provide negative surprises to the entire world. Richard Banks of Euro money feels that “Sub-prime is like a huge bomb thrown into an ocean, small fish come out faster than big ones.” The falling housing prices have also aggravated the impact of the situation. The North American REIT’s is on its way to post its first negative year since 1999, while also ending their seven-year run of outperforming the broader equity market. The sub-prime mess has become more critical as measurement of the amount of capital exposed to this has not yet been ascertained. As Angus Blair of Beltone Financial stated “This crisis is different from the earlier one. If we know what’s going wrong, we can price it into the valuation. At this point of time we cannot price this impact.” The sub-prime has raised the fear of a recession in the US. Marios Maratheftis of Standard Chartered Bank feels that “The US market will slow down, but if the labor market keeps up then there might not be a recession.” The slowing down in the US economy to 1.5-2% growth rate is also a negative for the global demand and growth rates. This has raised a far bigger issue of whether the world is more de-coupled now from the US. The BRIC (Brazil, Russia, India and China) group of countries has attained significant mass between 2000 – 2005. Currently, BRIC’s and the Euro land put together form 50% of the global demand a similar level of growth contribution to the world. However, the stock market correlation with US has also increased in the last three decades. During the period between 1976-1988, the Asian markets ex-Japan was correlated to the US markets to an extent of 40%. This has increased to 80% in the period between 2000 and 2007. Marios Maratheftis believes that “There is financial de-coupling, however, if there is a recession there might be a negative impact across the world.” The expected slowdown in the US economy will also mean a decline in the US dollar. At present the US dollar has declined heavily against most of the global currencies. The Euro has appreciated by 11%, Yen by 6% and within the region, the Kuwaiti Dinar by 5.19% during the year to date period. The forecast is that of a continuing weakness in the US dollar. However, Gopal Menon of Markaz opinioned that it would be only in the medium term. He feels that “The dollar is definitely on a down trend and will continue till mid 2008. The boom in the Emerging Market is not going to continue forever, and when these economies slow down they will invest back into USD.” This will mean more room for appreciation of GCC currencies in the foreseeable future. Marios feels that “Interest rates have collapsed in GCC. Further as there isn’t any consensus between the GCC countries regarding de-pegging their currencies against dollar, a 5-10% revaluation might be the only solution on the table.” He also added that Kuwait had de-pegged its currency at the right time. Apart from the appreciation of the currencies, the panel felt that there might be a very minimal impact on the GCC economies due to the events unfolding in the Sub-prime arena. Sherif Raafat of MIBC group (and former CEO – Cairo & Alexandria Stock Exchange) feels that “Impact on Sovereign Wealth Funds (SWF’s) will depend on their asset allocation. On an overall basis the region will not have a greater impact due to very minimal exposure.” However, the fall out has been an increase in interest rates globally. This is expected to carry a more valid impact on the region due to the growth of Private equity as an asset class in the last five years. Ali Khalil of Markaz states that “Over the past 12 Months, there has been a slow down in the market. Spreads have increased by 100 bps. Last year, international buyers participated in local bonds, which have declined this year. We were doubling every year in terms of bond issues in the region. However 2008 may witness a slowdown.” The slow down in US economy should also impact the oil prices due to a decline in demand. However, Seham Razzouqi of OPEC feels that “in many cases fundamentals do not support price increases and decreases. In the recent past the prices have been more driven by speculators in the market who treated the oil contracts as a financial instrument. However, going forward Prices may not see the lows that were seen in the past and also not the highs that the oil touched in the recent past.” This optimism on oil is expected to reflect on the performance of corporate within GCC. However, the panelists raised concerns about the institutional investment structure within the GCC. Phillip Thorpe of Qatar Financial Centre feels that “Most institutional investors, both regional and international, are rational and would demand better regulatory structure to operate”. In a recent research by Markaz titled “To Leap or to Lag: choices before GCC regulators” most of the GCC countries were ranked way below its emerging market peers in terms of the regulatory framework. Sherif Raafat feels that “The GCC markets are predominantly IPO driven. The capital markets do not have a Capital Market Law. The institutional investors behave more like retail investors with high amount of turnover in portfolio’s rather than taking strategic stakes in companies for medium to long term.” This would require intensive investor education. Manaf A Alhajeri stated “SWF managers in the region increasingly rely on the asset allocation schemes designed by international asset allocators, who consider the region a part of new emerging markets thereby riskier and hence tend to have very small exposures to investments in the region.” Chris Figee of Mckinsey feels that “There should be separate mandate that is needed for SWF’s to educate the local markets in which they reside in.” On the whole, the panel concurred that the liquidity crisis is hard to quantify at the moment. However, the impact of a US slowdown on global growth, especially that of emerging markets, will be limited. The dollar slide will continue and may force local governments to act sooner than later. Oil prices will see continued strength. The panel then shifted its discussions to the prospects of various asset classes. During the last 4-5 years, there has been an increased focus by institutional investors to increasingly go into alternative investments. Marco Peirsimoni of Credit Agricole feels that there is an explosion of sub asset classes and hence the need for more sophisticated asset allocation strategies. For e.g. credit has developed to be an asset class by itself. The panelists by far felt that US equities may be in for a correction during 2008, as it has been in a bull run for nearly 5 years now. Tim Guinness of Investec believes that a 15% to 17% correction in US equities may be imminent. While the panelists were not bullish on developed market equities, they seem to be upbeat on emerging markets which continue to enjoy high earnings growth. Bharat Shah of Ask Investment Managers (India) believes that valuation metrics being used by international investors may be misleading as the underlying indices track only a fraction of total universe. Emerging markets are enjoying capital efficiency and growth. Return on capital employed is close to 25% with economic value added of nearly 8%. However, Tim Guinness feels that China is a clear case of bubble about to burst. Sheriff Raafat of MIBC prefers resource based economies. Gopal Menon of Markaz feels that more of American money will find its way into emerging markets. Emerging markets are attracting investments in infrastructure. Richard Banks stated that India alone attracted somewhere close to $6-7 billion in infrastructure investments from foreign investors. The panel debated the fortunes for GCC stock markets. Mujib Moosa of Markaz feels that given the structural strengths of GCC economy, GCC stock markets should be re-rated to a price to earnings multiple of 20. Banking stocks are favored due to their consolidation potential. In an effort to improve shareholder value, banks are foraying outside the GCC to buy growth. Bassam Al Othman of Markaz feels that real estate is a traditional and conventional asset class in which regional investors were invested for a period longer than equity as an asset class. There are many strong drivers for real estate including the potential growth in tourism. There are concerns though in the form of land prices. Foreign investors can take part in regional real estate through funds. Ali Khalil of Markaz believes that regional private equity scenario would continue to be robust. He particularly favors sectors such as service, infrastructure and health care. Sherif Raafat of MIBC feels that regional private equity should move beyond a “flip over” mentality. The event concluded with members expressing their opinions regarding the asset classes to consider for investments in 2008. Bonds / fixed income was the least favored asset class whereas investments in emerging market equities, commodities & resource based economies was the most preferred by the panel members. ### About Markaz Kuwait Financial Centre S.A.K. 'Markaz', with total assets under management of over KD1.4 billion as of September 30, 2007, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997; and was awarded a BBB+ corporate rating by Capital Intelligence Ltd. Photo Caption (Left To Right): Top Row: M.R. Raghu- Markaz, Gopal Menon – Markaz, Tim Guinness - Investec GSF Global Energy Fund, Angus Blair - Beltone Financial, Bassam Al-Othman –Markaz, Ali Khalil- Markaz, Sami Shabshab- Margulf, Marios Maratheftis - Standard Chartered Bank - ME. Bottom Row: Bharat Shah – Ask Investment Managers Pvt Ltd, Phillip Thorpe - QFC R A, Seham Razzouqi – OPEC, Manaf Alhajeri – Markaz, Richard Banks –Euromoney, Sherif Raafat - MIBC Group, Chris Figee – McKinsey. Absent in photo is Marco Piersimoni - Credit Agricole.