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Western institutional funds unlikely to return to GCC in 2009: EFG-Hermes

By Shuchita Kapur

Western institutions are unlikely to return to GCC markets for most of 2009, says EFG-Hermes in its latest GCC Strategy Note sent to Emirates Business.

However, the research agency does not rule out temporary and intermittent flows "given ongoing volatility, both in the Middle East and in global stock markets".

According to the report, data on the flow of funds indicates the Middle East markets in general continue to see outflows of foreign capital, while global emerging market (Gem) funds are witnessing a gradually improving trend. This, says EFG-Hermes, is as expected.

"The Middle East remains a frontier market and will therefore be the last to witness a recovery in flows from foreign investors. We are mindful of the decelerating trend in outflows since it will also reflect the decreasing value of equity holdings," the report said.

It added the impact of Western institutional flows becomes exacerbated due to the lack of a large and stable base of local/regional institutional investors – traditionally insurance and pension funds.

Analysts maintain the only source of positive funds flow is likely to come from regional dedicated funds, which EFG-Hermes believes is "too small, relative to the scale of overall liquidity in the GCC, to have meaningful impact".

Meanwhile, the report adds that cash positions as a percentage of total assets under management remain at elevated levels, confirming the high risk-aversion levels at present. The report also maintains that while, globally, institutional investor concerns remain high, in the GCC they are higher still.

"Credit default swap (CDS) spreads have risen globally since early January but the GCC has witnessed a far sharper acceleration in spreads relative to emerging and developed markets. Dubai continues to have by far the highest spreads (at 740 basis points), followed by Bahrain (475 bps), while Abu Dhabi, Qatar and Saudi Arabia remain in a narrow range (260-300 bps)," the report said.

This rise in risk-averseness corroborates with the pickup in foreign investor outflows across the GCC, as well as ongoing movements in fund flows over the same period of time.

According to EFG-Hermes, at the beginning of 2008, foreign (ie non-Arab) investors comprised a significant proportion of the overall investor base: 18 per cent of Dubai, 13 per cent of Abu Dhabi, 11 per cent of Qatar, and 26 per cent of Oman.

At the time, the penetration levels were very close to the respective amounts of equity that was open to foreign investors. One year on, these penetration levels have tumbled to 4.5 per cent in Dubai, two per cent in Abu Dhabi, nine per cent in Qatar and 10 per cent in Oman, says the report.