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International real estate: U.S. retail - second quarter 2019

Date : 11/09/2019
Author:  Ahmad Hayat

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The quarterly newsletter aims to provide our investors with our views and analysis of key trends that impact our real estate investments and real estate investment strategy.  In this Q2 2019 issue, we will cover Key Indicators within the U.S. Brick and Mortar Retail Market (such as strong total retail sales and positive net store openings) and Retail Fundementals.

Section A: Key Retail Indicators
 
  1. E-commerce vs. Brick and Mortar
The U.S. brick and mortar retail market (“B&M retail”) has been viewed under a negative lens over the past several years partially due to the strength of the e-commerce sector. Although e-commerce sales have been increasing at a rapid pace (CAGR 13% between 2010 and 2018) traditional B&M retail still makes up 85% of the US$ 3.6 trillion consumer retail market.

Figure 1 – Historical In-store, E-commerce sales and E-commerce percentage from total sales

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Source: U.S. Commerce Department
 
 
  1. Net Store Openings
 
The strong number of store openings that have been witnessed over the past 8 years also signifies the strength of the brick and mortar retail market. Trends such as the expansion of discount stores and traditional B&M retail stores acting as brand ambassadors have been two of the key components fueling positive net store openings.  Although there have been store closures they have been primarily driven by highly leveraged private equity firm acquisitions in which decreasing sales resulted in downward pressure on bottom lines. Between 2010 and 2017, the retail market experienced over 652 million square feet of positive net store openings.

Figure 2 – Net Store Openings

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Source: U.S. Census Bureau, Co Star, Business Insider

Section B: Retail Fundamentals and Capital Markets
 
  1. Supply and Demand
Overall demand has outpaced supply between 2010 and 2018 with net absorption totaling 660 million sf vs. completions totaling 467 million sf. The delta between supply and demand peaked between 2014 and 2017 (total of 110 million sf net differential between supply and demand) with the sector returning to near equilibrium levels in 2017 (resulting in stable vacancy rate levels).


Figure 3 – Supply and Demand
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Source: Marcus and Millichap
 
  1. Rents and Vacancy
Due to positive net absorption and limited levels of new supply, the retail market vacancy rate has reached 6.6% (its lowest levels in the last 10 years). Retail rents have also been trending upwards, reaching an average rate of US$ 16.7 / sf.


Figure 4 – Rents and Vacancy
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Source: Cushman and Wakefield
  1. Transaction Volumes and Cap Rates
Retail transaction volumes have also been increasing steadily between 2010 and 2018, reaching US$ 71 billion in 2018 from US$ 21 Billion in 2010 (CAGR 16.58%). Within the same period, the average prime retail cap rate has compressed from 8.80% in 2010 to 6.79% in 2018 representing a 201 basis point compression.


Figure 5 – Transaction Volumes and Cap Rates

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Source: JLL, CBRE
 
Yes, e-commerce has disrupted the B&M retail segment over the past several years but examples of the importance of the B&M retail segment can be exemplified by Amazon’s US$ 13.7 billion acquisition of Whole Foods and Dominos’ expansion plan that aims to add 9,700 stores (60% increase in stores) by 2025 (Source: Bloomberg, Dominos). This coupled with positive store openings, healthy sales levels, and steady market fundamentals; portions of the retail market are expected to remain healthy.
 

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Rise of Markaz robo-advisor: a digital portfolio planner tool

Date : 27/08/2019
Author:  Hussein Zeineddine


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Artificial intelligence (AI) is changing the world of retirement and future course of income planning, by using enhanced datasets and algorithms to efficiently deliver solutions tailored to Investor’s needs. AI can help them save, invest and retire better. One of the hottest trends to emerge in this area that use the data supplied by clients to create and automatically manage their investment portfolios.

Robo-advisors have achieved significant success in recent years. The robo-advisors managed $128 billion in assets as of November 2017, an increase of $88 billion from 2015. Organizations launched its robo-advisor solution in 2016 and has amassed $19 billion in assets during a one-year period, which shows that performance of robo-advisors is quite appreciating.

According to John Stein, CEO of robo advisor Firm that manages over $8 billion for 240,000 customers, stated that their growth path over the past few years has been faster than the growth of mutual funds and ETFs and the reason is the robo-advisors. Even when those products were new, in their early days. This idea of technology-driven, smarter investing is really transforming the way that people think about what they do with their money. It is taking off in a way that has never been seen before.

However, Are They The Most Effective Solution?
Based upon the above data and monitoring closely the recent trends that are taking place in financial industry, Markaz’s pioneering Management, Information Technology Services team and highly qualified analysts along with some of authentic service providers in market are working together in order to introduce a new Portfolio Planner tool that will change the future course of investments for its clients within the Zone. 

Rise of Robo-Advisor at Markaz
Markaz robo-advisor is an authentic online financial advisory platform that provides algorithm-based investment management services, including automated portfolio planning, automatic asset allocation, online risk assessments, account rebalancing and numerous other digital tools. Markaz is a customer driven organization where client’s needs are put first. High-end technology and qualified analysts at Markaz ensure client requirements are taken care of. When it comes to client‘s dynamic financial goals, Markaz leaves no stone unturned in order to ensure client assets are safe. 

Customers Need Human Interaction and Customization As Well
While robo-advisors are completely machine based tools, they appear particularly strong in the areas of account opening, enrollment and investment management, but they seem to lag behind in areas such as customer relationship management, wealth planning and client servicing. Nevertheless, Markaz’s newest tool will remove all these obstacles for our esteemed customers.  

Markaz robo-advisors will have a number of benefits, including an easier onboarding process, a suite of automated capabilities and minimal investment requirements compared to traditional alternatives. Markaz’s combination of human and robotic intelligence is going to bring revolution in the Kuwait financial industry. The algorithmic mathematical analysis by Markaz robo-advisor on client investments is combined with robust planning by highly qualified relationship officers (analysts). Robo-advisors also typically use their reduced fees to target millennials and low-income households. Markaz robo-advisor will offer its customers an automated solution to help them take their investment decisions. Our customers are our pride and keeping in consideration their dynamic financial goals, Markaz is bringing this brilliant tool to the market. 

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Some Special Features of Markaz Robo-Advisor
•    Markaz robo-advisor will target minimum assets under management (AUMs) and simpler account types that only vary based on the risk level.

•    Robo-advisors available at market cannot have deeper conversations as financial advisors do to further understand client interests and build a more customized goal plan. However, robo-advisory service at Markaz will ensure additional support is provided at any point of time especially in terms of changing goals and plans also helping clients to reassess the risk profiling and online questionnaires

•    Current robo-advisors available around are lacking at adapting to changing circumstances and cannot provide life-stage management effectively. However, Markaz robo-advisory services would provide our clients a human touch services as well

•    Markaz robo-advisory is bought into functionality only after a detailed research and analyzing some of the current shortcoming of market Robo advisors.

Markaz robo-advisor uses the artificial intelligence technology. This will be interlinked with one of the Markaz’s sophisticated asset management system called Vestio, which will serve as a primary data source. It is accompanied with few of the markets data providers with whom Markaz is integrating in order to extract market data information. Once a client fills up the questionnaire regarding his personal information; investment goals and risk tolerance. Markaz robo-advisor compiles all this information and provides reliable results. Markaz robo-advisory services is going to be available online and through a mobile app. A client can access his details anywhere anytime. With this, Markaz is all about brining innovation to Client doorsteps.

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Tags:  Advisors, App, Robo, technology

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What Is the Future of Ecommerce in the Arabian Gulf?

Date : 04/11/2018
Author:  Marmore MENA Intelligence

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The Arabian Gulf or the GCC region’s retail sector has been going through sweeping changes that are not only disrupting the conventional retail but reshaping its future too. In recent times, the mode of retailing in the GCC has gone through substantial changes that was unimaginable a few years back. There are clear signs of transformation in the retail sector in the region. There is increasing scope for e-commerce in the Middle East, with Saudi Arabia and the United Arab Emirates establishing the template for sustainable business models that other countries can look to emulate ( Fitch Solutions-Middle East E-commerce 2018).

Over the last decade, e-commerce industry has grown 1500% in the region. In terms of average spending, an online user spent US$300 in the UAE compared to US$90 in Saudi Arabia, US$94 in France and US$1100 in Canada in 2017 (Albawaba-UAE the next E-commerce capital-2018).  However the size of e-commerce in the GCC region is relatively smaller. According to estimates, e-commerce just stood 2% of the total retail sales in the region in 2017 with the UAE taking the lead, followed by Saudi Arabia (The National and MR Raghu MD Marmore MENA Intelligence 2017).

GCC e-commerce market was estimated at US$3.4 Bn in 2015, US$4.8 Bn in 2016, US$6.7 Bn in 2017 (Arabian Gazette- E-commerce Market Value in MENA 2017). Marmore research predicts it to reach US$20 Bn by the end of the decade, i.e 2020. The table below summarizes various predicted values for expected size of the market by 2020/22.

Table 1: Various Estimates of E-commerce market size in GCC countries 2018
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Source: Marmore and Secondary Research 2018

The ripple effects of digitized commerce will be wide and deep, directly impacting the conventional physical stores (retail industry), employment and the logistics sector. The growing youth population, higher mobile and internet penetration, high disposable income and booming FinTech industry, are expected to propel digital commerce. In the GCC, mobile penetration is recorded at 76% of the total population, and internet connectivity is reaching above 90% of the population in countries such as Bahrain, Qatar and the UAE (GSMA the Mobile Economy 2017).

In the GCC region, 73% of total mobile subscribers are having mobile internet, while smart phone adoption is 72% as on Q2 2017. Additionally, GCC regions top the other Arab countries and MENA in terms of technology adoptions and utilization (Ibid ). In terms of demographics, almost 50% of the population between 26-35 years prefer online transactions in UAE, Saudi Arabia and Kuwait. Younger population groups tend to have lower internet utilization. Similar is the case for higher and middle-aged population across 3 GCC countries, as shown in chart below.

Chart 1: Online Purchase Activity by Age Group 2017
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Source: Service Plan Middle East 2018
 
E-Commerce Ecosystem
In 2017, when Amazon acquired Dubai-based online retailer, Souq.com, it changed the rules of the online game forever in the Middle East. According to reports, Amazon paid US$850 Mn for Souq (Tech Crunch-Amazon Completes Acquisation-2017). The acquisition not only established Amazon’s footing in the region but also heated up the e-commerce competition and helped formalize the structure of the sector.

Table 2: Key E-commerce Market Players in the GCC
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Source: Sayidaty Digital Group-Brining Commerce and Content together 2017

Surprisingly, while more than half of the population is under the age of 25 in the region, (Youth in the GCC-Booz & Co. 2017)  only 15% of businesses in the region have their online presence (Practical E-commerce 2017).  On the demand side, the key reasons for the rise in e-commerce are, namely, ease of shopping, new payments mechanisms, development of FinTech, multiple merchant points, rise of e-wallets and other alternative payment systems (ICT report-E-commerce in Saudi Arabia). Thus there is an increase in consumers’ willingness to use and accept such technology. On the supply side, the wide range of shopping brands to choose from is one of the prime factors driving the e-commerce market. Huge investments, innovation in consumer mobile devices and connectivity, entry of new players, competitive prices, expanding logistics services are the other key factors shaping the e-commerce market in the GCC region.

Table 3: E-Commerce Benchmarking
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Source: Secondary and Marmore Research 2018. *approximately**Asia Pacific region 2017 of the total retail sales

Culturally, GCC countries are mainly cash-driven. Although mobile and internet penetration is high compared to global standards, the urge to touch and feel the physical product and, to some extent, a mild distrust in online payment mechanism have emerged as challenges before the region’s e-commerce market. In an environment of cultural conservativeness and technology evolution, Middle East is yet to embrace e-commerce on a full scale. The Table above provides the insights into online customers’ psychology.

Although the e-commerce growth in recent times has been phenomenal, complete trust and confidence in the system is yet to develop among the GCC population. In Bahrain, for instance, product search and data collection are among the top online activities, and online shopping is done by less than one-third of internet users. Also, in countries with higher online shopper penetration rates, such as the UAE and Saudi Arabia, the frequency of buying online remains subdued (PN News Wire- GCC B2C commerce market report 2018).
Overall, the key pressing issues before the e-commerce sector are summarised below:

  • Prevalence of cash-on-delivery over other payment methods and consumer wariness of safer online payment transactions.
  • Most of the countries lack a unified address system which, on the one hand, creates challenges for last-mile delivery.
  • Extensive use of mobile phone to trace customer location (PN News Wire 2018) makes delivery difficult.
  • Lack of a well-developed unified online payment system.
The online payment infrastructure is still in the evolutionary stage in the region and lacks deeper public trust. In Saudi Arabia, for example, about half of the population remains unbanked and card payment penetration is just over 40%. In terms of logistics, most of the online retailers don’t have well established warehouses and the distribution network is still weak (AT Kearney-Getting in on the GCC  E-Commerce Game 2017).

Strategies to drive e-commerce transactions in the GCC
Given this background, some of the strategies to improve the ecommerce transactions in the GCC are discussed below:

For consumers in the Middle East and Africa, price-points or promotions (34%) are the most likely factor driving purchasing decisions, followed by brand (24%) (KPMG). This makes personalised messages and product recommendations crucial. Promotions using data-driven marketing and deep learning (a subfield of AI) can be widely used to understand the individual’s shopping wallet. Entry of new players can increase competition and add better quality of customer service and better discounts.

As exhibited in Table 3, a majority of regional customers prefer to check products personally. In such a case retailers may use strategies like providing comprehensive information about the product ingredients, easy returns and satisfaction guarantees. Also, understanding the motivation of shoppers, their behaviour pattern (behavioural targeting) through browsing patterns can improve the services offered by online retailers and make people transact more online. 

In order to improve the payment method, online retailers and local banks can leverage new forms such as QR code payment method which would enhance customer convenience. Online retailers providing “bank transfer” option at checkout can offer a dynamic QR code via app that consumers can scan using their mobile banking app and confirm the payment. In China, the ICBC’s (Industrial and Commercial Bank of China) QR code payment is used for all small payment services, thus speeding up the e-commerce payment experience. Such payment methods can also be more secure as the payment information is not carried through the merchant's store network.

Thus the e-commerce platforms can increase the outreach of customers in the region by redesigning the digital solutions that can increase speed, convenience and visibility. In addition, regulatory drivers like cashless societies, financial inclusion, protecting customers and more open banking competition can increase e-commerce transactions in the region. Though the GCC region is a late adopter of e-commerce, regionally tailored solution and strategies like improving the customers’ trust, better logistics, reliable online payment system and increasing competition among the e-commerce players can offer great results.

This article is published in "Marmore Blog"

Tags:  Ecommerce, GCC, Technology

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Real Estate: The “Traditional” Alternative

Date : 14/10/2018
Author:  Bassam N. Al-Othman

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In the past, real estate was considered the primary investment of choice. However, over the last few decades, stocks and bonds have become the main constituent of an investment portfolio. Currently, real estate is one of the major asset classes within the alternative investment world.

Financial vs. Real Assets
The main difference between financial assets (stocks and bonds) and real assets (real estate) is that the latter represents actual rights to consumption rather than indirect financial claims generated by the assets of the firm.

Main characteristic of real estate investments
The real estate market operates in cycles that vary between 5-7 years.
The cycle provides health to the overall industry by providing a natural hedge against potential bubbles. In general, the cycles are more evident within mature markets.
   

                             

In addition, real estate is considered an operationally intensive asset requiring specific managerial expertise, unique know-how, and ongoing oversight.

Asset Allocation Methods
As with other asset classes, asset allocation within the real estate industry can be achieved either through a top down or bottom up approach. The top-down approach is to take a big picture view of the different real estate categories, whereas the attractiveness of the individual assets drives the bottom up approach; however, the most common method is using a hybrid approach, combining drivers of both procedures to reach the optimal investment decision.

Direct vs. Indirect Real Estate
An investor can gain exposure to the real estate sector through various vehicles. A very straightforward method to categorize these vehicles are whether they are direct or indirect. As per the “National Association of the Real Estate Investment Trusts”, a direct investor invests in the asset itself, whereas an indirect investor invests in the expertise of people managing his money. The below sections are written from the perspective of a direct investor.
 
Benefits and Drawbacks
The main advantages to real estate investing include but are not limited to:
  • Potential hedge against unexpected inflation
  • Diversification benefits with other investment classes
  • Absolute return investments
  • Generate cash inflows through rentals
The main drawbacks to real estate investing include but are not limited to:
  • Heterogeneous characteristics make due diligence difficult
  • Inability to divide investment into the desired size (Lumpiness)
  • Illiquidity due to high unit cost and transaction size
  • Overstated risk adjusted return as the data is smoothed since real estate values are based on appraisals
Investment Styles
Core, value, and opportunistic are three very common style categories used to describe real estate investments. Established by the “National Council of Real Estate Investment Fiduciaries” these styles classify investments by volatility.

Core – Debt like instruments characterized by low volatility and leverage. Income generated from rentals rather than capital appreciation represents most of the returns.

Value add – Moderate volatility and leverage with most returns generated from capital appreciation rather than income generation. These investments include semi leased core properties and properties undergoing renovation or repositioning.

Opportunistic – Equity like instruments characterized by high volatility and leverage. Capital appreciation represents almost of the returns from this style. These investments include developing raw land and redeveloping properties that are in poor condition.
 

Tags:  Estate, Real

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Mutual Fund Asset gathering in the GCC region – What it takes to click

Date : 13/09/2018
Author:  Marmore MENA Intelligence



 

Mutual fund assets in the GCC are quite small compared to the size of the GCC economy. The total Assets under management (AuM) in the six GCC countries stands just at USD 32.9 billion (Reuters). This is quite low when compared to the combined GDP of GCC countries of USD 1.5 trillion. In percentage terms, the total mutual fund AuM in GCC is just 2.2% of GDP. Considering the global equivalent of AuM to GDP at 15.2%, there is plenty of scope and opportunities for the mutual fund assets to grow in the region.
 
Asset Gathering has been difficult even in a liquidity surplus region
Asset gathering has been difficult in the region as seen from low size of mutual fund AuM compared to the GDP, in spite of the abundant private wealth and liquidity. Equity mutual funds, the primary vehicle for asset gathering were hit hard by the global financial crisis of 2008 which led most investors to pull their money out and the industry has not recovered since then. Then, there are other structural reasons as well. Local investors, many of whom have their own private family businesses have invested their surplus in overseas markets like the U.S which have performed exceptionally well since 2009. In contrast, GCC stock markets have underperformed which has created a negative cycle with fewer institutional participants leading to lower market liquidity which discourages other investors from investing in GCC focussed equity funds. Bond Funds are a relatively new product and since the GCC debt markets have only recently seen reforms, their size is also very small. Real estate funds, a popular choice of many GCC investors have given negative returns since 2015 and so have been unable to increase their AUM.


 
Source: Reuters; Data as of May, 2018
Note: Mutual funds whose geographical focus is GCC has been considered

Other asset classes like Private Equity have suffered because of corporate governance issues, lack of transparency, poor exit track record and paucity of information. Private wealth management has also not gained traction as banks focus more on offering products than offering solutions. Combination of these factors have contributed to the sluggishness of asset gathering in the region.

Private Wealth management – products not tailored to individual clients and segments
The GCC region is rich in private wealth with total investable and liquid assets expected to exceed USD 3 trillion by 2021, according to a report by the Boston Consulting Group. The percentage of households classified as ‘affluent’, those with investable assets between USD 250,000 and USD 1mn has been increasing faster than HNW and UHNW segments. And yet, GCC players have not been able to tap into this market. They are more sophisticated and tend to be engaged with their investments, but still need investment advisors to educate them and explain financial matters to them. GCC funds have also not been able to offer products tailored to individual client needs. For example, female investors are increasingly gaining in importance across all segments and have different investing styles than male investors. But, they are offered the same ‘plain vanilla’ options available to all investors and there is no specific proposition that caters to their needs. The fees charged by private wealth managers also tend to be very high, with investors paying as much as 3 -7.5% of their assets as fees every year, though this is also the case globally as well (https://www.ft.com/content/ecf13900-f0b2-11e3-8f3d-00144feabdc0).

Challenges faced by Mutual Funds in GCC
Mutual funds also face difficulty in marketing and distribution to GCC nationals who are primarily reached through banks. AMCs often enjoy exclusive access to their parent bank's distribution network. This creates a situation where it is difficult for an AMC to compete if it does not have a network of bank branches. The result is a few AMCs dominating the asset management industry with fewer options for investors. The low level of institutional participation is a big factor in the low liquidity in equity markets and discourages other institutional investors and hampers asset gathering.

Ways to overcome the challenges
Clients of GCC asset management companies generally comprise of high net worth clients and institutional investors like SWF’s, Pension funds and insurance companies. Semi-skilled and high skilled expats in the GCC could prove to be a viable customer base for them to target. Due to their affinity towards sending funds back to their home market, asset management companies in the GCC could possibly collaborate with fund houses in the expats’ home market to launch products oriented towards their home markets to attract investments from expats.

The current product structure is more skewed towards money market/ trade finance funds followed by equities whereas asset classes like real estate, bonds, commodities, etc. have negligible share. While clients do look for consistently good performing funds, they are veering more towards wealth management solutions than fund opportunities. Wealth management solutions focuses more on asset allocation and fill them up with funds, preferably low cost. Wealth management also focuses on other client needs like trust services and online portfolio tools. It will turn the game from “product” based to “solutions” based. Banks are quick to realize this potential and are moving towards elevating their private banking into wealth management focused. Such a transition for asset management companies will enable increase in asset and client base.

GCC Asset management industry also needs to evolve to keep up with the current times. Despite Baby boomers (born between 1945 and 1960) and Gen-X (born between 1961 and 1980) accounting for higher wealth share at the moment, fund houses must focus more on the growing Gen-Z population (born after 1995) as the former’s needs are already been well taken care of by now and hence may represent a dwindling opportunity for GCC asset management houses. Products must be tailored towards Gen-Z, who are more tech savvy, flexible, more risk taking, and social media friendly. Use of technology in areas like customer profiling, portfolio options, product evaluation, performance reporting, etc. would be beneficial in this regard.

Mutual funds can target segments where there are strong growth prospects like in Shariah-compliant investments. Even though Muslims comprise nearly 25% of the world population, less than 1% of financial assets are Shariah compliant. The total AuM of the global Islamic asset management industry rose from USD 53bn in 2012 to USD 59bn in 2016, a meagre annual growth rate of 2.44%. An area of potential growth is in pension funds which represent less than 1% of global Islamic funds. Considering that the size of government pension funds in the GCC is USD 438 billion, even a 10% market share would mean a USD 44bn Islamic pension fund industry, benefiting the Islamic fund Industry as a whole. These funds can also be marketed easily to GCC nationals and foreign nationals who are Muslim, who will respond favourably to a fund which has been approved by a Sharia board.

The opening up of GCC real estate sector led to the participation of institutional players like REITs, pension funds, insurance companies etc. in the real estate industry. The equity markets can also benefit similarly with more institutional players. GCC Pension funds can be mandated by regulation to invest in GCC equity markets which will increase stock market liquidity and institutional participation, ultimately leading to increased AuM. GCC Pension funds can make also use of ‘securities lending’ to short sellers to increase their returns as short selling has been introduced to GCC stock markets. American pension funds have been able to increase their returns by 4 basis points (http://www.pionline.com/article/20171030/PRINT/171039988/securities-lending-makes-comeback-with-big-funds), which can be bettered by GCC pension funds considering their huge size relative to the total GCC market capitalisation. Encouraging family owned private companies to list in stock exchanges can provide more investing options for fund managers and increase liquidity in markets.

Private Equity funds can benefit from the on-going economic reforms in the region as it diversifies away from oil. Setting up of innovation centres like UAE’s AI smart lab provides opportunities for start-ups to flourish and PE funds to invest in them and get returns. Continuing with reforms will also increase foreign fund inflows improving liquidity in equity markets allowing profitable exits of Private equity ventures. Changes in regulatory framework of privately held companies can solve corporate governance issues which hamper private equity.


 
Source: Reuters

Finally, Asset managers in the GCC need to offer a wider variety of financial products to cater to both GCC nationals and expatriate workers who come from all over the world. Creating such products and marketing them to people with different risk profiles would be both a challenge and an opportunity for GCC Asset management companies.


This article is published in "Marmore Blog"

Tags:  Funds, GCC, Mutual

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