MENA Asset Management Key questions and Policy Perspectives

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MENA Asset Management Key questions and Policy Perspectives 16 - Dec - 2013

Kuwait Financial Centre “Markaz” recently published a strategic note on MENA Asset Management Industry. In this strategic note, Markaz discusses the key issues that confront Asset Management Industry in MENA region and puts forth policy actions, which would help establish growth in the Industry for the long run.

Markaz report points out that MENA Asset Management Industry which currently manages approximately USD 62billion in assets in about 782 funds has been in the doldrums post global financial crisis with Assets under Management (AuMs) steadily declining. AUM/GDP ratio for half of the MENA countries was less than 0.5%, implying lack of mutual fund penetration as an investment option. The MENA asset management market is concentrated among the top asset management companies, with the top 10 asset managers (out of a total of 174 managers) accounting for over half of the total assets being managed.

Lack of avenues to participate in the economic growth story, political risk and the resultant volatility has made the task of raising funds a challenge. Broad basing the equity market, enhancing the participation of institutional investors and opening up ownership to foreign participants would help to tide over the problem and improve industry AUMs.

According to the report, carnage of global financial crisis is still felt with weak economic growth in most developed economies and uncertain outlook. Investors who got badly bruised did not just lose their capital but also the trust which they had in their advisors. While the global AUMs have been stagnant for the past four years, AUMs in MENA region has witnessed steady decline over the years. Sovereign Wealth Funds are massive in size and too large for MENA markets and investing locally would not help their cause in achieving diversification. Ultra high net worth individuals (UHNI’s) are a niche group who are predominantly served by private bankers. The retail clients are a polarized group, they either trade aggressively or shun markets altogether and invest in bank deposits.

UAE & Qatar were recently upgraded to MSCI emerging market Index, which fueled discussions about the viability and possible timeframe for Kuwait and Saudi Arabia to be included in the same way. Saudi Arabian markets are closed for foreign (non-GCC) investors. While in Kuwait banking industry is subjected to 49% ownership limits which effectively accounts for 23 per cent of Kuwait Equity market. Also due to the presence of large strategic shareholders, the rights of minority shareholders are restricted. Lack of clarity in regulatory framework and the fact that not all regulations can be found in English is also a deterrent. Regulatory amendments and market infrastructure improvements would pave for favorable consideration by MSCI.

Foreign Direct Investments (FDIs) which have been the game changer for many markets can bring with them a host of changes and greatly institutionalize the market. However, foreign investments in GCC stock markets have remained on sidelines so far and much needs to be done to attract them. Disclosing timely and comprehensive information in English would be a good start. Expediting corporate governance measures, strict enforcement and adherence to accounting standards, standardized corporate announcements and guidance from management would help better understand the business and would result in efficient markets, benefitting all in the long run. Innovative measures such as unifying stock exchanges could help in increasing market liquidity, limiting volatility, enhancing confidence for market participants and consequently can provide an attractive destination for international institutional investors.

Debt markets in MENA are largely underdeveloped and widely characterized by lack of trading in secondary market. Primary market issues are tilted towards long-term maturity promoting buy and hold strategy which in turn has led to shallow secondary markets. Issuing government securities at regular intervals across maturities would help in establishing sovereign yield curve and further helps to properly price risk for private issues.
Market liquidity which averaged USD 140bn in the past four years (2005-2008) preceding global financial crisis slumped to an average value of USD 32bn in the next four years (2009-2012). The relative halting of lending played a large part in declining liquidity, as earlier to financial crisis, availed credit was funneled to purchase securities. The average annual growth in loans during 2004-2008 was 29%, reaching a high of 38% in 2007, fell subsequently to single digits. Also, the retail investors who constitute the bulk of market participants are undergoing their own state of de-leveraging post the global financial crisis.



AUM growth

·         Enhance participation of institutional investors,

·         Broad base the market and opening up of ownership to foreign participants.

·         Strive for inclusion in emerging market index.

·         Initiate pro-business bureaucracy

·         Improve public sector governance which enforces accountability

MSCI Index Inclusion

·         Increase foreign ownership level;

·         Disclose market information in a timely manner and in English.

·          Develop framework for stock lending and short selling.

·          Recognize nominee status and establish omnibus structures.

·          Lack of custodians needs to be addressed.

·         Regulators to adopt this as a key performance indicator.

Developing Debt Market

·         Issue government securities at regular intervals across maturities to establish sovereign yield curve.

·         Promote local currency debt issuance.

Improving Liquidity

·         Expedite establishment of good governance practices.

·         Increase competition to lower trading costs.

Attracting Foreign investment

·         Liberalize foreign exchange market for ease of capital flows;

·         Develop off-shore currency markets.

·         Initiate institutional reforms to enhance the stability of system.

·          Adherence and enforcement of law to be strengthened.

Spurring innovation

·         Modernization and unification of stock exchanges.

·         Unified licensing and listing procedures for companies across the region.

·         Introduction of hedging instruments.

About Kuwait Financial Centre “Markaz”

Kuwait Financial Centre K.P.S.C “Markaz”, with total assets under management of over KD 1.04 billion as of September 30, 2013, 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.