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04 October 2023

GCC shies away from emerging markets

GCC shies away from emerging markets. (EB FILE)

By Shashank Shekhar

Even though emerging markets have been repeatedly suggested as a hub for investments flowing out of the GCC, fund managers say the figure is still small and ranges between five and 15 per cent of the overall asset allocation.

Some asset managers say the figure could be lower – hovering at about 10 per cent of the overseas allocation, when the overseas allocation would stand at 30 per cent of the overall asset allocation. The amount of investments flowing into a country like the US alone is still 40 per cent of the entire portfolio allocation.

"Emerging markets sound very glamorous. However, the volatility [in emerging markets] can be dramatic. It's dangerous. And to have an uncalculated amount of risk in a portfolio is not a good long-term way to invest," said Jahangir Aka a Senior Executive Officer with SEI Investments, Middle East.

Fund managers identify political risks and lack of transparency as key factors hindering investments in emerging economies located across continents from South America to Europe to Asia.

The continuous flow of money into emerging markets is beginning to raise concerns about asset prices overheating, the International Monetary Fund recently warned. Terming the phenomenon 'Famine to Feast', Washington-based Institute of International Finance estimated that private capital inflows into the emerging markets will jump by 66 per cent this year to $722 billion (Dh2.65 trillion). The report, however, did not elaborate about the amount of investments that have flown or are expected to flow into the emerging markets from the GCC. Dubai-based asset managers are unable to provide even a wide estimate of the amount of capital outflows taking place from the GCC to the emerging markets. They cite a confusing investment environment in which the source of funds cannot be ascertained for their inability.

Those handling investment outflows from the GCC maintain that the investment appetite of investors towards emerging markets has a relationship with the client's age.

"Basically it's the younger ones who are willing to take risks and, therefore, they prefer emerging markets where returns could be high," said Kashif Arbab, Managing Director of Killik and Company, Dubai.

When GCC countries such as the UAE and Saudi Arabia are on the verge of being classified as emerging economies, there is an apparently growing reluctance among local investors to invest within the region. Even sovereign wealth funds in the region have not deviated from their mandate of investing internationally, Aka said.

"We have seen a shift in investment strategy of investors in the GCC. If asset managers were earlier allocating 50 per cent of their investments into offshore markets and 50 per cent into local markets, they are making an allocation of 70 per cent to the overseas markets and 30 per cent to the local markets," he said.


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