International investors seek GCC exposure

International institutional investors controlling more than $1.1 trillion dropped by Dubai last week to listen to 30 senior managers of top firms in the GCC at a Shuaa Capital conference. Asset managers from the United States, Europe and Asia met CEOs and CFOs of companies such as Arabtec, Kuwait Projects (Kipco) and Salama.

Rami Sidani, vice-president of the asset management division of Shuaa Capital, believes the rise of crude over the past five years to $100 per barrel is a clear signal for international institutional investors to look for exposure to the GCC. Making a play in listed companies in some of the “the largest oil producers in the world is not surprising because these markets and economies are expected to experience higher growth compared to other emerging markets”, he told Emirates Business.

Selling these stocks is a major part of Sidani’s job, but he claimed it is not a tough sell. “Valuations are very attractive. The region’s markets are trading at about a 25 per cent discount to other emerging markets and about a 30 per cent discount to historical averages,” he said.

In addition to the attractive valuations, Sidani said, firms in the GCC enjoy lower costs of capital and a higher return on equity, so the fundamentals dictate that the region should be trading at a premium compared to other emerging markets. “This explains the huge inflow of foreign money into the Gulf over the past year.”

Officials from Dubai, Abu Dhabi and Qatar have been actively marketing their capital markets after the 2006 crash, as they try to attract more international institutions to the region’s markets. Last year, the Abu Dhabi and Dubai exchanges embarked in separate road shows to London and New York, and also took senior executives from the UAE’s top-listed firms to tell their stories.

These road shows were hailed as a success, but foreign investors are still hesitant about one major deficiency in the Gulf’s nascent corporate culture. Transparency ranks as a top issue for foreign investors, Sidani noted. “International investors only invest in transparent companies that have good communication with the market, which has added pressure on regional firms to open up,” he said. But corporate disclosure has improved significantly over the past few years, he added.

Valuations, high oil prices, and improved transparency have undoubtedly given regional markets a boost, and have fuelled curiosity among the world’s investor class.

Udo Schaeberle, Head of Private Clients in the Gulf for German-based BHF Bank, a private bank catering to wealthy European families, moved to Abu Dhabi two years ago mainly to attract investors from this region to invest in Germany and Europe. While countless private equity firms and hedge funds have successfully implemented this business model in the past, Schaeberle was surprised by a different demand. “Suddenly all our German clients saw that we have an office in Abu Dhabi and asked how can we invest in this booming region,” he said on the sidelines of the Shuaa conference.

In order to accommodate the demand of his existing clients in Europe, BHF Bank started looking at the available investment options available, but according to Schaeberle, they did not meet their requirements. “We usually use third-party products, funds from the big names such as HSBC and JP Morgan, but in the case of the GCC we did not like their products because the market is not 100 per cent efficient, so we decided to set up our own product,” he explained.

The main problem with the investment vehicles in the Gulf for the German investors is that most of the funds in the region do not allow daily redemptions.

“Our clients love to be able to exit if they need, which they don’t do often, but they want to have the possibility to exit on a daily base, so we offer them daily liquidity if they like,” said Schaeberle.

The bank launched its first fund in September 2007 with just $15m in assets under management. Today, BHF is managing more than $300m, and according to Schaeberle, the fund is up 25 per cent since its launch. This fantastic growth is due in part to investor interest, and also due to the higher profile GCC stocks are enjoying with investment professionals. “We have started advising our clients to put two to three per cent of their portfolios in the GCC.”

But Schaeberle also noted that there are limitations to how much capital can be deployed in the region. The markets are nowhere near as deep as Western or Asian markets, and many stocks have foreign ownership restrictions. In the case of Saudi Arabia, global investors have no access to the markets. Given these limits, BHF Bank predicts that it will control up to $750m in the GCC. Schaeberle explained the bank (and its clients) are conservative, and do not wish to grow too quickly in any market, especially as the opportunities are limited due to ownership restrictions. The fund only invests in listed equities that are open to foreigners, with one caveat. “Obviously we cannot invest directly in Saudi Arabia, so we go for the Saudi Gateway Fund [from Shuaa] because we can’t buy into the stocks independently.”

Another concern that affects European investors is the fall in the dollar – which corresponds with a fall in the Gulf’s dollar-pegged currencies. Schaeberle hedges the currency risk, but he believes the currency risk in the region is lopsided. “We sell the dollar forward, and what we keep is the upside potential of the Gulf currencies against the dollar, which is what our clients want to keep. We believe that someday the revaluation of GCC currencies will have to come.”

Halpert’s rationale for giving the region’s companies more weight in his portfolios (Prince Street is directly responsible for investing $270m) is by now a familiar story. The Middle East is “is important for us in terms of diversification, because historically these markets have a low correlation with other markets around the world”, he said, adding that the region has many exciting opportunities. But one reason why he has allocated 25 per cent of Prince Street portfolio to the region is because “most American institutional investors don’t know much about the region, which gives me an opportunity as an independent investor to make money here”.

Prince Street is a boutique firm that deploys its clients’ (mainly American and European) capital into some of the world’s riskier markets. “We are not a normal company – we are very aggressive,” Halpert explained.

The Middle East is part of this aggressive strategy, but the firm also has exposure to markets in Central Asia such as Uzbekistan. “We made quite a nice return there last year,” he said, but added that “liquidity, transparency and disclosure in Uzbekistan is not up to the standards of Saudi Arabia and Jordan, so we didn’t have as much money invested there as here. But on a long term basis it is very interesting”.

Just like BHF, Halpert is managing and investing foreign money in the GCC without extracting capital from local investors. “We have no clients in the Middle East and we haven’t even thought about raising money here.”

Halpert has witnessed the transformation in transparency and disclosure of regional companies and believes the information available to investors has improved over the years. “While we do our own research and invest directly in the market, we do business with Shuaa and EFG-Hermes, and I have found that local Arab brokers have better research than the international banks,” he said.

This focus on quality from local brokers and investment banks makes Halpert believe Dubai “is going to be a major global financial centre on a par with Hong Kong, Tokyo and London”.

The numbers

$1.1trn

$98.1m