With deals in the West drying up and massive job cuts being announced almost every week, investment bankers have begun flocking to emerging markets, which include the GCC countries, for opportunities.
“It is now a trend. Investment bankers want to work in the East,” Kashif Zia, senior vice-president for investment banking at The National Investor (TNI), told Emirates Business.
“Every week, we receive applications from investment bankers in New York and London who want to practice their skills in corporate banking and private equity here. And they are really keen to relocate,” Zia said.
TNI, an investment bank based in Abu Dhabi, has recently hired two executives and is still looking to recruit a few more. An exodus to the East is a natural progression as the region’s economy continues to grow and the economic sickness in the West persists, Zia said.
For the first two months of 2008, the financial sector has already lost 22,000 jobs. On top of that, analysts say another 30,000 finance jobs could be lost by the end of this year, as the credit crisis continues to unfold.
New York City, home to Wall Street firms such as the Bear Stearns and Goldman Sachs, has been beleaguered by job cuts. On the other hand, banks across Europe, especially in London, are paring jobs or instituting freezes on recruitments.
The current gloomy scenario is further darkened by the IMF’s confession that the United States is in mild recession and that the downturn is expected to slowdown growth throughout the Western hemisphere. While the housing sector fairs better in Europe than the US, IMF officials indicate they are still lowering their European forecasts.
“While we see deals in London or New York drying up as the US recession seems very difficult to contain, we see the GCC markets closing a number of deals. And there are in fact more deals in the pipeline,” Zia said.
“Five years ago the capital markets in the Middle East were literally non-existent and today we see the massive growth. So there are a lot of activities here,” Zia added. “Saudi Arabia is opening up and the rest of the region is undergoing an economic liberalisation so they need more people.”
In addition to Shanghai and Mumbai; Dubai, Abu Dhabi, Doha and Riyadh are the top preferred destinations of investment bankers who are keen to relocate. There is also a growing interest in the North African region, particularly in Egypt and Tunisia, Zia revealed.
The heightened momentum is buoyed primarily by the region’s move to increasingly shift its investment strategies to prepare for the day when the region’s oil reserves run dry. The Middle East sovereign wealth funds (SWFs) have been investing in alternative investments as high-risk hedge funds and other alternative investments. And these venture funds are taking direct stakes in major corporations – especially financial-service firms.
“There has been a shift of momentum to the East due to the growth of the economy and oil surpluses,” Edward Morse, managing director at Lehman Brothers, told Emirates Business.
“The tight credit market in New York and London has also prompted the shift so it’s logical to move some transactional operations in the East where there is plenty of credit available,” he added. Lehman Brothers has recently opened offices offering total services in Dubai, Doha and India.
Richard S Fuld Jr, Lehman Brothers chairman and CEO, said: “The Middle East today clearly has a prominent role in the world economy. Our clients around the world are looking at us to assist them, while, at the same time within the region, corporations as well as governments are looking for financial solutions that we can deliver.”
According to Nasser Saidi, chief economist at DIFC, investors have moved out of banking and financing institutions in the United States and Europe as this sector has earned the reputation of “being adversely affected by the credit crisis”. “What we see is the increased interest in the emerging markets. Although you got this general risk aversion, people will still have to park their money somewhere,” Saidi told Emirates Business.
According to a recent report by Merrill Lynch, equity markets in the Middle East and North Africa region had outperformed other emerging and developed markets due to the strong macroeconomic fundamentals. Equity markets in the region are not completely invulnerable to the global margin call and risk aversion. Mena’s capital markets are expected to maintain its momentum from 2008 up to the mid-term, it said.
“The Gulf is expected to trade at a premium to other emerging markets given healthy macroeconomic growth, low risk premiums and abundant capital and solid current account positions relative to other fast-growing frontier markets,” the report added.
The region, it noted, has just recently recovered from the 2006 crisis where a market capitalisation of $1 trillion (Dh3.67trn), more than the region’s $700 million GDP, was wiped out.
The recovery, which according to Merrill Lynch was “quicker than most post-bubble experiences”, will be sustainable driven by an economic boom of unprecedented scale.
Saidi said: “Clearly, emerging markets have the growth opportunities. These countries are very liquid and are very investment-driven. All of that means that the investors are attracted to the emerging markets and it’s very promising for us.”
Overall, the emerging countries – of which Mena is a part of – will take charge in the next two decades, says another report.
The global centre of economic gravity is already shifting to China, India and other large emerging economies such as the UAE and Qatar. And in a few years time, China will emerge as the world’s superpower, says study, The World in 2050 by PricewaterhouseCoopers.
The report suggests that China could overtake the US in around 2025 to become the world’s largest economy and will continue to grow to around 130 per cent of the size of the US by 2050. India on the other hand could grow to almost 90 per cent on the same period.
Other emerging markets – Brazil, Russia and Mexico – will dominate the future economy and will overtake Japan, Germany and the United Kingdom, it added.
But it’s not only the growth factor. The maturity levels of these countries are also improving, Morse said.
“Their regulatory environments are now developed and can now match the protection for financial property similarly offered by New York and London,” he added.
Morse said this economic shift is good as it would create a more balanced world economy. “It would also help other slowing economy to overcome the difficulties or this mild recession more rapidly,” he said.
Zia concurs, saying the emerging markets – currently lacking the expertise – would benefit from the shift of Western people to the east. “This is good as they have the specialty which the emerging market needs. It’s a knowledge transfer and their specialty will be complemented by the people here who have the local expertise,” he said.
But not everyone agrees.
Speaking to Emirates Business Matthew Simmons, chairman of Houston-based energy investment bank Simmons & Co Intl, said: “Will they find a paradise in coming to the East? I doubt it since the Middle East does not need expertise of their balance sheets.
“The Middle East does not need Wall Street,” he said.
“We will probably always have Wall Street as a major market clearing house but the days of the powerful Wall Street firms ruling the world are gone with the wind just like the days when Rothschild’s and the Baring brothers ruled the world.”
Simmons said they are in the process of launching new offices in the UAE and China but their rationale is different from other investment banks. “We look forward to bringing our form of investment banking to the Middle East though we do this while the rest of our business is so busy that we were tempted to postpone this for another year or so,” he said.
Simmons said that most of the Wall Street firms’ deals were “so heavily tied into using their balance sheets to muscle into deals and they then took on immense risk”.
“Now that the balance sheets are in shambles, they have little deal flow. So they are laying off people but still paying their senior staff $15m to $60m.”
TNI’s Zia said the GCC is relationship-driven so the strength of a firm still lies in its people with local expertise. “The newcomers from the West will not replace the people who have been here because the region is still driven by relationships.”
2050: The year in which China could overtake the United States to become the world’s largest economy according to a US-based study firm