Weak oil prices ‘will hold back growth’

MANAMA: Weak oil prices will hold back economic growth and public spending, with negative consequences for asset managers in the GCC, says Moody’s Investors Service.

The Covid-19 crisis, low oil prices and geopolitical tensions are creating pressure on the profitability of the GCC’s asset management industry, notes a new report by the US-based ratings agency issued yesterday.

Moody’s has flagged moderate to high pressure over the next 12-18 months on the profitability of asset managers in most GCC countries, reflecting the coronavirus crisis and an accompanying drop in oil prices.

However, GCC governments’ plans to privatise some state-owned assets should provide some offsetting stimulus.

“The sector’s relatively low geographic and product diversification and regional geopolitical tensions will add further pressure,” said Vanessa Robert, vice-president and senior credit officer at Moody’s.

“Still, an improving regulatory environment and growing interest from foreign investors will provide some counterbalancing uplift.”

Weak oil prices will hold back economic growth and public spending, with negative consequences for asset managers.

A recent increase in tension between the US and Iran may harm investor confidence, delaying large scale infrastructure projects, weakening regional growth, and weighing on the asset management industry.

Most GCC countries have made regulatory changes to attract foreign investors since 2014, when falling oil prices made economic diversification more urgent.

The inclusion of Saudi stocks in the MSCI emerging stock market index in May 2019 has encouraged foreign investment.

As GCC markets open, local asset managers will likely capitalise on their expertise in the region to attract foreign clients.

Rules

“Bahrain, historically the jurisdiction of choice for many fund managers operating in the GCC, has also updated its regulation to attract more interest from international players,” said Ms Robert.

In 2017, the Central Bank of Bahrain (CBB) issued new rules that expanded the categories of locally-domiciled mutual funds to include Exchange Traded Funds (ETFs), establishing both conventional and Sharia-compliant ETFs.

As part of an effort to establish Bahrain as the region’s leading fintech hub, the CBB also issued comprehensive regulations for governing and licensing regulated crypto-asset services in Q1-2019.

According to PwC, total foreign ownership of GCC equities was about $60 billion at the end of March 2018, about 6 per cent of total market capitalisation.

Foreign ownership stakes in listed GCC companies are generally limited to 49pc, and additional restrictions apply for some strategic companies.

However, regulatory obstacles to foreign capital are slowly being removed.

Moody’s said Bahrain became the first GCC country to permit 100pc ownership in 2016, resulting in foreign investments amounting close to 90pc of GDP.

In its GCC outlook, the agency has listed strong performance and growing demand for Sharia-compliant investments as positives.

The region’s asset managers’ track record of strong performance has allowed them to maintain relatively high fees, contributing to solid cash flows and financial profiles.

The GCC’s most common investment vehicle is private placement, where fees vary according to the size of the mandate, the asset class, and the expected performance.

Fees for active equity management range from 1pc to 2pc.

“GCC asset managers benefit from close relationships with local investors, which include a high proportion of high net worth individuals and sovereign wealth funds. Their strong investment performance has reinforced their client relationships over time, allowing them to build and retain assets under management (AUM),” said Ms Robert.

Moody’s opines that GCC asset managers are well-positioned to capitalise on growing demand globally for investments that comply with Sharia.

Islamic AUM stood at $84 billion in H1-2019.

“We expect global compound annual growth in Islamic AUM to slow to around 2pc-4pc during 2020-2021 from around 10pc between 2016-2018 as a result of economic and market upheavals related to coronavirus pandemic,” she added.

Another key GCC trend according to Moody’s is the rise in investor expectations regarding transparency, oversight and corporate governance, driven in part by the failure of Abraaj group in 2018.

“GCC asset managers’ ability to attract foreign investment, or to develop partnerships with international peers, will therefore depend on whether they can meet international standards.”

Source: http://www.gdnonline.com/Details/861653/Weak-oil-prices-%E2%80%98will-hold-back-growth%E2%80%99