By V L Srinivasan, Qatar Today Magazine
Cash registers are ringing and business prospects look upwards. How should businessmen prudently manage their assets to ensure unhindered growth? Qatar Today finds out more about asset management in the country.
According to a report by global firm Arcadis entitled “Global Built Asset Performance Index 2014,” the wealth generated by each member of the population in Singapore was estimated to be $29,500 (QR107.4 million) in 2013, a figure expected to remain broadly the same during 2014.
Qatar and the UAE, with estimated wealth generated at $20,500 (QR74,620) and $17,500 (QR63,700) respectively, are ranked second and third in the world after Singapore and it is here that the asset management industry experts play an important role in assisting and advising the companies, banks and the HNWIs about their investment plans (see chart).
As far as Sovereign Wealth Funds (SWFs) are concerned, the GCC countries, with more than ten funds and close to QR7.28 trillion ($2 trillion) worth of assets under management, account for 34% of the Global SWFs, which are to the tune of QR19.65 trillion ($5.4 trillion).
Across the world, the built asset wealth in 30 countries (including Qatar, the UAE and Saudi Arabia from the GCC region) generated an income of over $27.1 trillion (QR98.64 trillion) in 2013. These countries represent a mix of advanced and emerging economies from all regions of the globe. This figure is expected to rise to $28.1 trillion (QR102.29 trillion) in 2014.
In the Middle East, Qatar and the UAE performed better than Saudi Arabia as the share of built assets to their respective GDPs has been more. This is due to lower energy subsidies in these two nations compared with Saudi Arabia. Added to this is the relative low cost of labour which keeps construction costs down, facilitating the rapid formation of built asset wealth.
The Arcadis report also says that by 2022, when Qatar hosts FIFA World Cup, the performance of its built assets are expected to grow by over 40%, ahead of countries such as the UK, US, Russia, Canada, Turkey, Australia, Singapore and The Netherlands but behind China, Saudi Arabia, the UAE, Malaysia, Hong Kong and South Korea.
Driving force
Qatar’s asset management industry is ramping up on a number of prospective opportunities, particularly driven by the nation’s current mandate to develop a broad and sustainable infrastructure system.
Wealth and political stability, progressive policies, and the scale of growth and opportunity are significant factors that, among others, drive the growth of asset management in Qatar. Three key-drivers - a rising per capita income, greater levels of client sophistication and more risk appetite from local investors that are increasingly looking for ways to diversify their portfolios – also have helped in the development of the asset management sector.
Qatar’s wealth is stable and proven, underpinned by QR728 trillion ($20 trillion) hydrocarbon reserves and with the absence of political unrest due to the high levels of social investment, the country is currently situated on stable grounds for development and investment, and it is that stability that is appealing to investors and developers.
Qatar’s key focus is on diversification in asset creation across all physical asset classes including healthcare, infrastructure, commercial, residential, entertainment, education and culture. Changes in many regulations, especially those in reassuring investors that Qatar is a safe place to invest in and also to do banking in the country also helped in the industry’s growth. Some of the modified regulations include “know your customer,” anti-money laundering rules and increasing of foreign ownership limits of Qatari companies listed on Qatar Exchange.
“Resurgent stock markets, a larger fixed income and more institutionalised capital markets, Qatar’s upgrade to emerging market, better depth, breadth and an improving regulatory environment - served to boost trading volumes, investment product offerings and capital inflow to the asset management industry,” says Robert Pramberger, Acting Head of Asset Management and Director of The First Investor (TFI), a shariah-compliant investment company specialized in asset management, investment banking and real estate.
In addition to government spending, high levels of disposable income and wealth created by Qataris is expected to drive the sector’s growth, a trend that will be enhanced in the coming years.“Regional asset managers are well positioned to benefit from the increasing appetite in equities which is driven by recent performance, the commitment of policymakers to expand the non-hydrocarbon share of domestic economies as well as a historically low (and prolonged) interest-rate environment, a combination that makes equities one of the most attractive asset classes,” Pramberger avers.
Prospects and risks
Despite substantial wealth and being one of the natural focal points for investors in the region, development of asset management in the country has not kept up with the rate of GDP growth. This, in turn, has created a significant opportunity for the industry’s growth.
QInvest’s Head of Asset Management Dr Ataf Ahmed says the past few years have seen an increasing level of participation from local investors and this is set to continue with more investment firms looking to move to Qatar. There is also a growing level of interest from foreign investors - both local and abroad - as local investments are somewhat isolated from factors that impact developed global markets.
As far as risks are concerned, Dr Ahmed says they are primarily centered on a potential loss of confidence in the event of a large exogenous political event in either Qatar or nearby.
“Instability in Iraq and Syria has had minimal impact on Qatar in the past. However if there were any significant military action in one of the GCC countries, it is likely. The potential loss of the 2022 World Cup is another risk which, if it was to happen, would reduce confidence and have a negative impact even though the actual impact on GDP would be marginal,” Dr Ahmed says.
Richell says that the market is also experiencing a significant amount of risk that requires close monitoring and active management.
“Qatar can easily develop at an unsustainable pace where development gets beyond the state’s ability to cope. In addition, there is a need for a robust overall strategic delivery plan that supports the QNV 2030 and the National Development Strategy to avoid ad-hoc, unstructured development, which could further affect Qatar’s ability to deliver a clear and concise message to investors, institutions and individuals alike,” he feels.
Another risk is the challenge to attract and retain highly skilled professionals. There is strong competition for the best talent and if Qatar is unable to attract and retain the best then the industry will not achieve its full potential.
The key risk, according to Pramberger, resides mainly in the competition especially coming from the large international asset manager selling their funds via third party wealth managers in the region.
“The opportunities definitely exist since the per capita earnings are very high and wealth management is an area that is in its infancy. The risks are, of course, like in any industry that one may be too slow to capture the existing opportunities,” says Mohammed Ghiyath Sheikhah, Head of Local and International Investments, Qatar International Islamic Bank.
EM status
The upgraded standing of Qatar in the global equity indices is also expected to give a boost to the country’s asset management.
This international interest will continue to grow as familiarity of the medium investment case for Qatar improves,” says Akber Khan, Director Asset Management with Al Rayan Investment.
He says on the domestic front, the recent fall in Qatari deposit rates is a boon for the industry as it refocuses both individual and corporate investors, towards alternative options to boost returns on cash. Adjusting for inflation, bank depositors have lost money for the last three years. Many corporates are now considering bonds and sukuk as a modestly higher risk, but more lucrative, alternative.
“Even Qatar’s high-income expatriate population is an investor category that is rapidly growing in importance. They are experienced mutual fund investors and seek exposure to the economic prospects of their new home via equities and mutual funds,” Khan says.
Dr Ahmed also agrees that the upgrade - together with increasing the cap on foreign ownership limits - has seen more global groups increasing their exposure to Qatar.
This will help to bring in much needed liquidity to the local markets. The upgrade will also encourage more companies to list which will increase the size and depth of the market, he says.
Richells predicts Qatar can attract around QR14.56 billion ($4 billion) in investment after being upgraded as emerging market, and in addition, foreign ownership limits of Qatari corporations has been increased from 25% to 49%.
Regulatory environment
Though the government has announced reorganisation of the three regulators under the umbrella of Qatar Central Bank in December 2012, the process is still on an evolving stage in order to make the regulatory environment conducive for the industry’s growth in Qatar.
Dr Ahmed opines that more work could be done to streamline the regulatory regime and make it easier for firms to set up and launch services. At present, it can take a long time to establish a firm and set up funds. “Multiple regulators with sometimes overlapping remits can also make it challenging when compared with say the US or within Europe, where there is one central authority in each country and a clear process.
An additional issue is that whilst some regulators use English and Arabic, others work primarily in Arabic, which is a real obstacle for many international institutions,” Dr Ahmed says.
Qatar is demonstrating a progressive approach to a more accessible market for investors through platforms such as the QFC and a tax regime that benefits investors at the point of return, feels Richell.
An uphill task
Qatar still has to go a long way to become the leader of the asset management industry in the GCC region as it has to compete with Saudi Arabia, whose population is 28 million compared with its own 2.2 million.
Moreover, Saudi Arabia is home to hundreds of asset managers and institutionalized family offices compared with half a dozen asset managers in Qatar and only a handful of family offices which organize investments on institutional lines.
Though Qatar is ranked second in the world in wealth generation per person at present, Saudi Arabia may overtake in the coming years as its assets may start contributing more to the GDP in the coming years. To maintain its current position, Qatar has to make optimum utilisation of its built assets.
“Saudi Arabia’s asset management industry assets are estimated to be in excess of $100 billion (QR364 billion), dwarfing the industry in Qatar. There is no reason for Qatar’s asset management industry to be larger than its neighbour unless the Qatari government was to divert substantial funds towards it,” Akber Khan says.
Even Dr Ahmed is of the same view. “Saudi has a strong advantage over all of the other GCC countries simply because it has a much larger population and a deeper pool of liquidity and wealth,” he says.
The surplus wealth provides an opportunity for Qatar to embark on asset management industry aiming for leadership, Sheikhah points out that the frame work created by the government is very favourable for the industry though risks such as the market entry costs may be on the high side.
Richell however differ saying that leading asset management across the GCC is not the core focus for Qatar. “Given its unique set of circumstances, Qatar’s ambition is on improving the community by strengthening health, education and social mobility across the country. Qatar’s key focus is on driving further economic diversification across industries with extensive investment in infrastructure development,” he points out.
Prime sectors
Which sectors are most sought after by investors in GCC countries?
While Sheikhah feels that the energy sector is the most sought after by the investors in which the built assets can expect good returns, Pramberger says investors would look at real estate and financials as they tend to dominate domestic economies and invariably constitute more than 50% of local equity market capitalisation. "Both sectors are cyclical by nature, an attractive argument for investment during the current positive economic cycle,” Pramberger says.
Richell echoes the sentiments. Dr Ahmed, however, says asset allocation really depends on the investor type though investment is focused on energy, infrastructure, real estate and domestic consumption.
“Most retail investors are less focused on sectors and look more at either yield or potential growth rates for their investments.
Meanwhile, institutional investors typically take a more sophisticated approach to investing; one which is based on factors such as a particular fund’s mandate and the institution’s current macroeconomic view. For example, QInvest, currently like sectors such as healthcare in Saudi Arabia, consumer discretionary in the UAE and industrial and materials in Qatar,” Dr Ahmed says.
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