UAE retail investors prefer global equities

Retail investors in the UAE have a higher preference towards global equities compared to their counterparts in Saudi Arabia and Kuwait, who prefer Middle East and North Africa (Mena) equities, revealed the first survey on investment habits in the GCC conducted by Invesco Asset Management.

GCC investors, both institutional and retail, prefer investing in emerging markets over the next three to five years, a survey of more than 200 retail and institutional investors has shown.

Investing in China, India and the GCC are at the top of the priority list. The last year also saw a rise in risk aversion. Investors in this region also have short-term investment horizons compared to global benchmarks, the survey found.

"The UAE investors clearly have a higher level of interest in global equity and global bond products rather than regional products. Also, they appear to be the most risk-averse. That is probably due to investors, particularly retail, who bought a lot of structural products and were over leveraged. They were looking to deleverage and therefore have higher need for liquidity and cash – hence there were more risk aversion," Nick Tolchard, Head of Invesco Middle East, told Emirates Business.

"The issue is whether the preference for emerging markets is a cyclical or a strategic change. We believe it is because the GCC investors expect emerging market returns to exceed those in developed markets," he said.

"GCC investors' behaviour highlights the need for the asset management industry to address the issues of managing demand for emerging markets along with increased risk aversion, align time horizons with risk return outcomes, and devise product strategies for different GCC markets," said Tolchard.

Investment time horizons

Investors in both retail and institutional segments are opting to invest their money for shorter durations. Only around 12 per cent of institutional investors in the GCC have an investment horizon of more than five years, while more than one-third of investors have a time horizon of up to one year, the survey showed. Invesco said as markets stabilise, retail time horizons could be expected to lengthen. It attributed the reduction in time horizons to factors such as the transient nature of retail expatriate clients and investment losses during the global financial crisis.

"On closer inspection we found that family offices and private banks that manage discretionary money for their high net-worth clients, take a shorter time horizon than retail banks and IFAs, who provide advice on retirement and investment planning," the survey said. It noted that perceptions differed along the supply chain in the retail market. International firms that design products for the retail market noted significantly longer investor time horizons than advisors who distribute products to the retail market.

Commenting on the "short-term and highly volatile investment attitudes in the institutional segment", Invesco said: "The presence of sovereign wealth funds (SWFs) in the GCC is a key differentiator for many other institutional markets, which are typically dominated by large insurance and pension funds managing a high proportion of their assets against long-term liabilities. Our analysis suggests that short-term investment horizons extend beyond the few distressed companies (who are focusing on short-term for obvious reasons) to SWFs and other institutions. Based on this evidence, we hypothesise that more stable organisations, such as SWFs, have currently reduced time horizons to invest in assets priced at the perceived bottom of the cycle and exploit market volatility."

While time horizons in case of retail are expected to grow longer, forecasting was harder for institutional markets, said Tolchard. Life and pension fund horizons, he said, depended heavily on the nature of fund liabilities and recommendations by asset consultants, while SWFs typically balanced long-term and short-term investments with time horizons driven by individual objectives, the availability of funds and that of different investment opportunities, as well as the performance of past investments.

Emerging markets

According to the survey, 82 per cent of investors indicated a preference for emerging markets over the next three to five years in comparison to only 30 per cent for North America, 14 per cent for Europe and eight per cent for Japan.

"There is a notably high demand for emerging markets across all companies and territories," Tolchard said. Investors, according to the survey, preferred India, China and the GCC. "While many factors contribute to a preference for emerging markets, we believe the key driver is simply that GCC investors expect returns from emerging markets to exceed those in the developed markets," he said.

Retail banks predominantly servicing non-resident Indians (NRIs) place most business in Indian emerging market funds, while IFAs who service a mix of NRIs and western expatriates, allocate significant flows to the Indian emerging market and a number of European (developed and emerging market) funds, he added.

"At market level, the GCC has a strong preference for actively managed solutions but the survey highlighted significant exposure to passive structures in the SWF segment. However, the most important finding was the universal preference for emerging market assets," Tolchard said.

Giving details of preferences, he said in the retail market private client portfolios (created by family offices and private banks) most frequently contain global equities and alternative assets, whereas retail banks use local equities and cash, and IFAs use global equities and cash.

Asset managers, according to the survey, have a strong preference for property when benchmarked against other company segments. Portfolios are highly diverse in institutional markets but SWFs across the region prefer alternative investment vehicles – private equity and hedge funds.

Institutional investors also have a high preference for mainstream asset classes of equities, bonds and cash, while corporates prefer local over international assets.

"Differences between retail and institutional allocations are mainly explained by 'access' to underlying assets driven by scale and buying power rather than any underlying difference in preference.

However, differentiation within retail or institutional company sub-segments is in most cases determined by preference," explained Tolchard.

Preference for private equity

SWFs' preference for private equity and hedge funds may align to their opportunistic investment strategies. Below average allocations to local securities and commodities are expected given that the source of funding for SWFs (government revenue) is heavily dependent on commodity prices and the performance of the local economy.

The coming months are expected to see a preference for mainstream assets over alternatives, as well as shifting out of cash into equities, Tolchard felt.

While corporate preferences reflect local business activities as well as pure investment strategies, asset manager allocations indicate an expectation that local asset classes will deliver superior returns (with respect to the international equivalent) in the medium term.

"In the retail market, end-customer wealth and nationality play an important role in asset allocations," Tolchard explained.

In the HNW customer segment serviced by family offices and private banks, large investable assets (typical portfolios are more than $10 million) enable access to alternative assets, and mean portfolios of direct securities can be more cost effective than funds. Furthermore, high allocations to local assets reflect higher proportions of local Arabic clients relative to other retail segments.

Meanwhile, affluent customers serviced by retail banks and IFAs have lower, non-discretionary assets and thus allocate more money to cash and less to direct securities and alternative assets, which are often less cost effective or more volatile solutions.

Interestingly, international life company perceptions again differ from the advisory market, and allocations appear to reflect underlying investment options of their retail product wrappers, Invesco noted.

The Middle East is a diverse investment region and investor preferences vary in different locations, according to the survey.

"The Middle East is often portrayed as a homogeneous region, but the survey shows that this is not the case in spite of some surprising similarities. The influence of investor location over asset allocation makes it quite clear that the Middle East is a highly diverse investment region," said Tolchard.

The penetration of equities, fixed income, cash and alternatives (high-level asset class) is broadly consistent across all territories but there are important differences in investment sectors underlying each asset class.

Diverse investment approach

In the retail market, Saudi Arabia and Kuwait have a preference for Mena equities while the UAE and Bahrain support global equities. Similarly, in the institutional market, Saudi Arabia prefers local fixed income over the global equivalent, and private equity over hedge funds, while the reverse is true of Kuwait, said Tolchard.

"We believe this diversity is explained by access to investment products, which varies across the region. Certain markets, such as Saudi Arabia, have restricted access to international investments whereas others, such as the UAE, are dominated by offshore life wrappers with large international fund ranges," he said.

"Further, local bond markets are in the early stages of development in certain GCC territories and are [at best] restricted to a small number of large investors. In contrast, we feel that institutional preference for private equity versus hedge funds is predominantly driven by regional preferences and the relative success of past investments," the asset management company said.

In case of demand for cash, the Invesco survey found that investors in Saudi Arabia and Bahrain allocated investments to cash more frequently compared to those in the UAE and Kuwait.

"Given that these allocations do not correlate to investment time horizons, attitude to risk or respondent type, we infer that the trends are driven by territorial preferences," said Tolchard.

Differences in allocations according to geographical location are likely to continue widening, the survey said.

"Analysis of future asset allocations shows consistency across regions, so the most important trends are at 'market-level', where we observe a fundamental shift from cash to equities, plus a shift in specialist assets from private equity to commodities. Interestingly, there is no evidence of individual investment re-balancing; in fact forecasts suggest that territorial differences in allocations will continue to widen," it added.

Reduced risk appetite

Investors grew more risk-averse in the past year, the survey said. "Reduction in risk appetite happened in the past 12 months. Given that there are three key investor segments here – NRIs, UAE nationals or other Arab expatriates in the UAE, and western expats – all three sets of investors are risk averse but potentially for different reasons.

"NRI investors may have bought lots of structural products from banks and therefore have not necessarily had a good interest. Arab investors may have been less familiar with investing outside the GCC and so they are more concerned after seeing the market fall. And the western investors have potentially moved more out of Dubai, so they wanted to get their cash back," it said.

Follow Emirates 24|7 on Google News.