Industry outlook: How has the wealth management space fared in the GCC?

“When money realises that it is in good hands, it wants to stay and multiply in those hands,” author Idowu Koyenikan famously said.

Wealth management is not an avant-garde concept; wealth, in its primitive form, was measured in resources, cloth and often food. Before currency became a medium of measure and exchange, those in possession of rare metals and food items were considered wealthy.

Naturally, those who owned ‘wealth’, wished to retain and grow it.

However, conventional wealth management, similar to wealth, has gone through layers of evolution and disruption to morph into its current format: a specialised form of investment advisory service, designed for affluent individuals with diverse needs. It is a discipline that broadly incorporates financial planning, portfolio management and aggregated financial services, largely to maintain and increase a client’s wealth based on his financial goals and requirements.

Engaging the services of boutique firms, private banks, financial institutions and advisors, clients are increasingly keen on building value and wealth.

As methods of managing wealth evolved, so did wealth itself.

Today it has become an economic enabler, meriting a clear understanding of who retains it, how it is spent and where it is transitioned to better gauge potential economic scenarios.

In 2019, the number of ultra-high-net-worth individuals (UHNWIs) – those with a net worth of $30m or more – totaled 513,244 worldwide. That figure is forecast to grow to 649,331 by 2024, Knight Frank’s The Wealth Report – 2020 suggests.

“If we define ‘wealth management’ as the art of advising people on how to manage and invest their assets, the biggest changes from the viewpoint of the industry in recent decades would be the increase of regulation and digitalisation, combined with an increasingly complex market environment,” comments Ludovic Pernot, head of Private Banking Middle East, Liechtensteinische Landesbank AG.

“Speaking for our clients, the core of what we do remains unchanged – that is, to establish a personal relationship between a client and a relationship manager in order to be able to give financial advice in a holistic and comprehensive way.”

Each asset class has varied returns and correlates with broader economic conditions that prevail over different periods of time. Since no asset class has been found to outperform its peers constantly and perennially, therefore, it is critical to diversify and map a portfolio to the dynamic investment climate.

The proportion varies depending on numerous factors including risk appetite and asset preferences. According to the Wealth Report Attitudes survey – which polled the responses of 620 private bankers and wealth advisors who manage over $3.3 trillion of wealth for UHNWI clients – property and equities formed 27 and 23 per cent respectively of an average investment portfolio of such clients.

Real estate: Rewarding prospect
What do 90 per cent of the world’s millionaires reportedly have in common? Real estate investments.

For the average investor, real estate offers a dependable way to accrue wealth. Property investments are also fairly popular among those with a cautious mid-to long-term outlook as they offer relatively stable yields with the added advantage of capital gains. Property investments can be made via direct purchases, funds, trusts or investments platforms.

“Real estate is quite heterogeneous by nature, and there could be extreme dispersion in returns. One can invest in real estate in two ways – direct investments and financial instruments like REITs and funds. The former is characterised by high unit value (concentration), high transaction costs, illiquidity, and is usually held as a separate asset, outside of an investment portfolio. However, real estate linked financial instruments, both listed and unlisted, make it easy for an investor to get a more diversified exposure at much lower costs,” says Madhur Kakkar, CEO at Century Private Wealth, a Dubai-based wealth and asset management firm.

“Real estate forms part of the alternatives asset class and could be a good return enhancer in a traditional portfolio. It benefits from a lower rates environment and is also considered an inflation hedge. Direct investments could yield both income (rents/lease) and capital appreciation. Similarly, investing in REITs can yield quite high dividends in a low rate environment and is a preferred mode for taking a more liquid exposure.”

Rental returns in the UAE have been promising, eclipsing those of property hotspots worldwide. Dubai properties offer over 7 per cent gross returns on average, compared to a 2.9 per cent rental yield in London, a 2.35 per cent return in Hong Kong and a yield of 2.85 per cent in Sydney. Singapore and Toronto offer 3.3 per cent and 3.9 per cent respectively, a Property Finder report reveals.

“Real estate is an important asset class among the various investment products and probably seen by many as an integral part of their portfolio. Emotionally, we all know that the moment we save some money and can afford it, our first major investment comes in the form of a house. Therefore, I believe real estate always forms a part of almost every investor’s portfolio at some point in time. It helps in asset diversification as well as provides certain stability to the portfolio – although in no way should it necessarily mean that it’s a safe investment,” explains entrepreneur and investor Shailesh Dash.

Equities: Box-ticking
Investing in shares of listed entities has arguably been a mainstay of portfolios. Investors can either profit from a surge in stock prices or via dividends. Companies are often categorised by market capitalisation, which equates to the total market value of a firm’s outstanding shares.

Regional equity markets have come a long way in terms of regulatory frameworks, foreign interest and local reach. After a strong end to 2019 with Saudi Aramco’s stalwart IPO, the year 2020 was understandably quiet for GCC markets due to the ongoing pandemic. Only three IPOs took place in Q1 2020 – Dr. Sulaiman Al Habib Medical Services and Sumou Real Estate Company in Saudi Arabia and Aman Real Estate Investment Fund in Oman. The IPOs collectively raised proceeds of $801.2m, EY confirms.

“Regional equity markets have underperformed in both developed and emerging markets this year. Their woes have been exacerbated by declining oil prices and geopolitical tensions, in addition to the shock from the Covid-19 pandemic. MSCI UAE index is down by 11 per cent this year, compared to MSCI EM index being down by just 3 per cent. Liquidity has been another issue facing regional markets as very few names are relatively liquid,” notes Kakkar.

However, albeit slow, regional equity markets continue to progress. In 2020, Boursa Kuwait marked its trading debut, becoming the GCC’s second publicly traded stock exchange after Dubai Financial Market. Meanwhile, Saudi Aramco once again became the world’s most valuable company after its market capitalisation rose above technology major Apple, according to a Bloomberg report published in September.

“Outlook for 2021 certainly looks better than where we stand today. Regional markets, especially the UAE, is cheap compared to other emerging markets and some quality names are trading at deep discounts. The region has handled the Covid crisis well and recoveries have been robust, which should lead to gradual economic recovery. On top of that, a recovery in crude oil prices as global economies recover would benefit regional markets. Sectors like healthcare and consumer could outperform,” adds Kakkar.

Exchange-traded funds: Greater diversity
Investors that prioritise diversity within their portfolios may lean towards exchange-traded funds (ETFs). An ETF is a basket of securities that trades on an exchange similar to a stock, holds multiple underlying assets, and provides investors with diversification benefits at low costs.

Regionally, exchange-traded funds appear to be gaining strength.

“Clients in the GCC continue to use ETFs to gain low-cost exposure across sectors both opportunistically, and as part of their longer-term strategic asset allocation. ETFs tracking the Nasdaq 100 have unsurprisingly attracted client money from the Middle East since March, and ETFs with China technology exposure have also brought in new investments. We see clients continuing to use and consider ETFs (or exchange-traded commodities) for precious metal exposure. Exposure to gold in particular, which has had a strong rally since March, can be accessed through ETFs, many of which are sharia compliant providing broader appeal to clients in the Middle East,” says Alessio Cirillo, sales director at Invesco EMEA.

Paul Cox, regional head of wealth development, MENA and Turkey, HSBC, adds: “ETFs are becoming more and more popular due to cost efficiency and variety. A significant number of customers are also using ETFs to diversify their portfolios which is, of course, very sensible. HSBC now offers in excess of 5,000 ETFs.”

Each ETF holds a different investment focus, while its strengths are clearly placed in its diversity – investors can either capture a set of stocks (stock ETFs), focus on a sector or industry of interest (sector ETFs) or alternatively invest in fixed-income securities (bond ETFs) or currencies (currency ETFs).

“ETFs are a comparatively new instrument to the region. I believe, personally, that the only way to promote the growth of capital markets is if the GCC economies are successful in their diversification strategies, and if the projected plans are successfully implemented. Hopefully more and more ETFs come up in the region because they are one of the best and low-cost solutions for investors looking for exposure into different segments of the market,” explains Dash.

Kakkar adds: “Exchange traded funds have garnered a lot of investor interest in recent years and the market has grown significantly. Globally, ETFs now hold about $7 trillion worth of assets. New investments into ETFs stand at $430bn this year, up 57 per cent compared to same period last year. They provide an effective, low cost, passive way to take exposure to markets.

“All the big asset managers have launched ETFs, not only in the broader index space but also in niche categories, covering certain sectors and themes, thereby offering a lot more variety to the investors. Passive market participants could easily access these through an exchange platform and take a diversified exposure at negligible to very low costs. This market is set to grow further as it becomes an integral part of instrument selection, not only for retail investors but also for institutional money managers.”

Gold: Safe haven?
Unequivocally, gold has been a long-favourite of investors. It is often treated as a hedge against economic uncertainty or political unrest or as a safe haven asset. Stowing the physical metal in the form of coins, bars or jewellery, ploughing into exchange-traded funds (ETFs) or investing in gold mining stocks are a few methods of reposing trust.

This year, while the Covid-19 outbreak proved to be a stern test for other asset classes, it has proved to be a banner year for one of the world’s mainstream assets.

Attesting the old adage – ‘gold loves a crisis’ – the metal gathered force in the months following the pandemic, amid looming economic uncertainty and concerns of lockdowns. It vaulted into record territory of above $2,000 an ounce in 2020, shattering its roughly decade-long record of $1,921 set in September 2011.

“As tradition dictates, gold is the ultimate safe haven when markets and economies experience unstable periods. We have seen an increasing trend of customers investing in paper gold versus physical gold across the region. This is a reflection of the change in mindset of younger investors. Having said that, physical gold is still very popular as culturally it is still very much synonymous with wealth. As ever, we advocate a well-diversified portfolio to mitigate volatility as much as possible and commodities such as gold add natural balance to a portfolio,” notes Cox at HSBC.

As the Covid situation evolved, so did gold’s grip. However, the difference between spot and futures prices highlighted the impact on gold’s supply chain, triggered by the pandemic.

“The spread between the spot gold price and the futures price (December contract) has come in significantly and is currently around a $5-$10 premium for the future. This compares to a spread of around $40 at the end of July, when most futures users were rolling into the December future and more than $70 at the height of the market dislocation in March,” says Christopher Mellor, head of EMEA ETF Equity and Commodity Product Management at Invesco.

“Futures prices blew out in March as a result of two key factors: The impact of Covid-19 related restrictions on smelting and transportation of gold, which lead to a shortage of gold to meet futures delivery needs in New York; and the impact of the crisis on risk appetite amongst trading houses and banks which meant a reduced willingness to enter into future contracts.

Both these factors have clearly eased, but there is still a risk that spreads on the next future contract as we approach the next roll.”

Despite opportunity costs associated with gold investment – the money could instead be piled into dividend-paying stocks – several analysts remain bullish on the yellow metal for the current and next year.

In April, Bank of America revised its 18-month gold price target to $3,000 an ounce from the erstwhile $2,000 figure. Seemingly, the bullion’s rally is far from over.

“Despite the correction of the past weeks, UBP continues to believe gold remains in a long-cycle bull market that should resume as stimulus accelerates again in early 2021. This pause provides an opportunity for investors not only to continue building positions in the physical metal following the sharp rally from March 2020 lows, but also to refocus on the gold mining sector which should see multiple drivers beyond rising gold prices as a performance catalyst,” suggests Norman Villamin, chief investment officer, wealth management and head of asset allocation at Union Bancaire Privee (UBP).

“Historically, low energy prices and falling local currency production costs mean that gold miners will see their costs fall by as much as 13 per cent to $900/ounce or more than 50 per cent below current spot gold prices.

“Beyond this, mine reopenings in late July and August following their Covid-19 related closures in the first half of the year should see volumes return to match the cyclically high margins in the sector and drive the next stage of earnings growth,” he adds.

Fixed income investments: Promised returns
Fixed-income investments have traditionally been considered to offer a steady stream of income. These securities are simple in premise – they are loans from an investing audience to an institution that needs money in return of periodic payments and original capital at a specific time. Debt instruments such as bonds are essentially issued by governments or corporations and are generally a means of raising long-term finance on prearranged, fixed cost terms.

Catering to a burgeoning Muslim investor pool, Islamic bonds – better known as sukuks – have secured considerable foothold in the region. Designed to comply with sharia principles, sukuks – unlike conventional bonds – do not pay interest and can be structured in different ways to produce payments for investors.

“GCC fixed income market has been quite small historically, but has been picking up steam in recent years, especially since the oil price crisis. Currently, it represents about 11-16 per cent of the broader emerging markets space. The total outstanding hard currency bonds and sukuk within GCC are in the $450bn-$500bn range, with the UAE and Saudi Arabia making up 65 per cent of the pie. Typically, 65-75 per cent of the fixed income issuance in the region is by sovereigns and GREs,” notes Kakkar at Century Private Wealth.

“This year, GCC debt is one of the top performers (+5.5 per cent as of end Sep), just marginally behind USD Corp IG (+5.8 per cent as of end Sep) and is way ahead of the broader EM
debt returns (1.9-3.6 per cent). It has been the busiest year so far for the GCC primary bond market as sovereigns ramped up issuances to plug deficits.”

Keeping pace with global bond markets, Dubai is fast emerging as a hotspot for sukuk listings, offering a suite of investment choices for local, regional and international investors.