Wealth management 2.0: How has the regional landscape evolved

The concept of wealth has evolved significantly – from clothes and metals to fiat and digital currencies, wealth has not only changed hands but forms as well.

As wealth evolved, so did the art of managing it. Hence wealth management too has gone through layers of disruption to morph into its current advisory form, which broadly incorporates financial planning, portfolio management and financial services, primarily to increase a client’s  asset base. What remains relatively unscathed is the value of wealth itself – that of being an economic enabler, necessitating a deeper understanding of who owns it, how it is spent and the trends that govern it.

Since differing asset classes have diverse yields, which can be imputed to their risk and return parameters and the prevalent economic conditions at the time, and since no asset class has been found to outperform its peers perennially, it is noteworthy to weigh them according to the dynamic investment climate. Which is why mapping out a diverse investment portfolio is only judicious.

Furthermore, as the digital and financial landscape further evolves and as priorities of well-heeled individuals shift, will wealth retain its current form or is it expected to be redefined in years to come?

By 2040, wealth won’t just grow, it will be redefined, fueled by a more knowledgeable and empowered client base, rapid digitisation, and far greater choice of providers and services, according to a Boston Consulting Group (BCG) report.

Furthermore, the pool of wealthy clients will change in the next 20 years – they will be more educated and economically empowered; more wealth will be in more hands globally; wealth in growth markets will increase faster than in mature markets; and women will grow their wealth faster than men, the report read.

“The wealth management landscape is undeniably evolving and more rapidly so, following the impact the Covid-19 pandemic is having on the industry. Challenging times can be a catalyst for future innovation and growth. The pandemic has accelerated digital transformation in the industry and forced it to react and adapt quickly,” notes Ludovic Pernot, head of Private Banking Middle East at Liechtensteinische Landesbank AG (LLB).

“Work has changed, supported by an ecosystem of virtual resources and technologies, which will continue to evolve and will help the industry become more dynamic and more efficient to deliver better value to clients. While focusing more on a holistic approach, personalised advice will remain the most critical and valuable trend, supported by an array of technological solutions, to benefit from greatly in the long run.”

COMMODITIES 
Gold: Safe stamped? 
From stowing the physical metal in the form of coins, bars or jewellery, piling into ETFs or investing in gold mining stocks, investment in gold comes in many forms. Last year proved to be monumental for the bullion, with the asset vaulting into a record territory of above $2,000 an ounce. However, gold’s performance this year has been relatively modest. In January 2021, ABN AMRO revised its gold outlook, with its new year-end 2021 forecast stationed at $1,700 per ounce from its previous estimate of $2,000 per ounce.

Christopher Mellor, head of EMEA ETF Equity and Commodity Product Management at Invesco, opines that it is always difficult to assess the valuation case for gold as, like all commodities, the price will be determined by the dynamics of supply and demand.

“Supply for gold is constrained, with mining increasing the total amount of gold above ground by around 1.5 per cent per annum. With only a finite supply of unmined gold, this source of supply is likely to shrink over the longer-term. On the demand side, jewellery making, central bank purchases and technology fabrication are fairly consistent sources of demand but the key swing factor in gold demand is investment. In 2020, $12.5bn of inflows into gold ETPs globally helped to drive the price of gold to a record high. Outflows totalling $2.2bn from ETPs in Q1 this year have helped to dampen gold prices somewhat, but we are seeing a return to gold ETP purchases in April with $0.6bn added in the month,” says Mellor.

The highest price for gold this year was during the first week of January when it reached $1,950, adds Pernot. “Gold prices have been consolidating since August 2020. Technically, around March 8th it was at the lower edge of a ‘flag’ formation and fell below the 200-day moving average. However, the current price should reflect the rise in interest rates, the moderate strengthening of the US dollar and a cyclical turn in the economy. Thus, the question of the interest rate development going forward remains,” he adds.

“We think that the potential for rising interest rates – especially in the US is limited, which is positive for gold. In addition, the continuously increasing debt burden – worldwide – poses risks that should not be underestimated, which is also positive for gold. Hence, we are still constructive on gold; for us, the long-term trends in fiscal spending are the most relevant drivers of price appreciation for gold going forward.”

Oil: Sustained revival 
Oil has witnessed a promising rebound in 2021 after having been put through a wringer last year, with lockdowns and grounding of commercial fleets crippling demand. As countries gradually reopen on the back of aggressive vaccination campaigns, fuel demand is making fresh headway into promising territory.

“Global oil consumption is now forecast to rise by 5.4 million barrels per day (bpd) in 2021, 270,000 bpd lower than in our previous report. The forecast for H2 2021 is left roughly unchanged, however, based on expectations that vaccination campaigns continue to expand and the pandemic largely comes under control,” the International Energy Agency said in its oil market report for May.

After nearly a year of robust supply restraint from OPEC+, bloated world oil inventories that built up during last year’s Covid-19 demand shock have returned to more normal levels, the agency added.

Meanwhile the US Energy Information Administration (EIA) forecasts that Brent prices will average $61 per barrel during the second half of 2021 and in 2022. From an investment perspective, opportunities within the industry have expanded locally as state-owned company ADNOC launched the trading of flagship crude oil, Murban, as a futures contract on the ICE Futures Abu Dhabi commodities exchange in March this year, making its crude grade more available to a wider set of market participants worldwide.

Equities: Must-haves? 
Regional equity markets rebounded well this year, keen to battle out the impact of the pandemic, which led to sedentary business activities. In April, the Saudi stock exchange Tadawul announced its decision to transform into a holding company, ahead of its plans for an IPO this year. Meanwhile, despite headwinds, Boursa Kuwait reported profits of KD28m for the 2020 fiscal year, a stellar increase of over 190 per cent compared to 2019.

“Following a promising start in Q1 2020, the Covid-19 pandemic sparked a steep decline in IPO activity in Middle East and North Africa (MENA), particularly in Q2 2020 and into Q3 2020. IPO activity in the region rebounded in Q4 2020 with eight IPOs taking place and this momentum has continued into Q1 2021 with a further four IPOs across sectors and geographies, with offerings in Saudi Arabia, Qatar and Oman,” an EY report read.

Madhur Kakkar, senior executive officer, Century Private Wealth notes that the regional equity markets landscape has changed considerably this year compared with 2020. “Regional equity markets massively underperformed both developed and emerging markets in 2020. Their woes were exacerbated by declining oil prices (down 21 per cent) and geopolitical tensions, in addition to the shock from the Covid-19 pandemic.

“Liquidity had been another concern for regional markets. However, come 2021, the scenario seems to have changed, predominantly attributable to rising oil prices, cheaper relative valuations and better handling of the pandemic within the region. Both MSCI UAE index and Saudi Tadawul index are up a whopping 20 per cent so far this year (prices as of May 17, 2021) compared with a meagre 2 per cent rise in the MSCI EM Index. The UAE has one of the highest vaccination penetration rates in the world and that has led to a successful reopening of the economy. Moreover, rising yields provided a boost to the banking sector and rising oil prices benefitted the petrochemicals space, both heavyweights in the regional equity markets,” he states.

Meanwhile, the EY report suggests that in the MENA region, there are many reasons for optimism in the quarters ahead. “A strong IPO pipeline in key MENA markets across sectors and government initiatives to deepen the capital markets, particularly in the UAE and Saudi Arabia, should help to bring more IPOs to market in the region,” it read.

Fixed income: Locked-in returns 
The region’s fixed income market has fared well in recent times. The GCC primary eurobond issuance in FY 2020 stood at a record $111bn; and corporate treasurers from the region are now having regular dialogues with their stakeholders (international investors and syndicating desks) to offer the best value propositions through prudent asset liability management exercises, a report by lender First Abu Dhabi Bank (FAB) revealed.

Locally, Nasdaq Dubai hosted multiple corporate and sovereign bonds during Q1 2021, including the $1.25bn bond by DAE Funding, the $750m bond by Emirates NBD and the $1.25bn bond by the Sharjah government, according to PwC Middle East.

Going ahead, the GCC fixed income market paints a positive picture. “GCC Eurobond issuance could exceed the $100bn mark once again in 2021, as sovereigns need to finance their sizable budget deficits and some $42bn of bonds are due this year for redemption. A similar amount of bonds are due to mature in 2022,” the FAB report added.

Exchange-Traded Funds (ETFs): Valuing diversity 
Those that value diversity within their investment portfolios may lean towards exchange-traded funds (ETFs) – a basket of securities traded on an exchange. Given that their strengths lie in their diversity, ETFs are a disruptive force that have added value to the global investment landscape.

“ETFs have become increasingly popular with investors, largely thanks to ease of access, greater variety, and cost efficiency. We expect this trend to continue in the region with more investors including ETFs as a way of diversifying their portfolios. They are also a preferred point of entry for many first-time investors, and with the general interest in investing having risen through the pandemic, we can expect to see more new investors accessing ETFs,” says Basit Saiyed, regional head of Wealth and Liabilities, Wealth and Personal Banking, Middle East, North Africa and Turkey, HSBC.

Investors can capture a set of stocks (stock ETFs), invest in currencies (currency ETFs), or pile funds across fixed-income securities (bond ETFs), among other options. Regionally, exchange-traded funds appear to be gaining strength.

Alessio Cirillo, EMEA sales director, Invesco explains: “In the Gulf region, the ETF market continues to gain strength as investors across different channels increase the adoption of ETFs within their portfolio, whether that be for a tactical position to take advantage of short-term rallies, forming part of their liquidity sleeve, or as a more strategic long term ‘buy and hold’ play.

“Many Middle East investors are using ETFs to implement investment themes where they see areas of growth. ESG [Environmental, social and corporate governance] has been one such theme as clients turn their attention to renewable energy alternatives like solar or clean energy. Middle East clients continue to hunt for yield and are seeing the benefits of accessing fixed income through the ETF structure, and this continues to be an area of growth. Investors are beginning to recognise the benefits of building a core portfolio using ETFs, which is accelerating the adoption of some of the lowest cost core beta products. ETFs tracking the most popular international indices such as S&P500 and Nasdaq are winners in this space.”

Real Estate: Prudent prospect
For the average investor looking to begin building his wealth, real estate is always considered a sound investment option. Apart from offering rental yields, real estate investments also carry the added advantage of capital gains. Property investments can be made via direct asset purchases, trusts and investment platforms.

“Despite the impact Covid-19 had on certain segments of the real estate market, the current low interest rate environment as well as the gradual economic recovery is favourable to this asset class. In this respect, the sector has been an integral part of our clients’ asset allocation, which enhances their portfolios’ risk-returns and provides overall diversification,” opines LLB’s Pernot.

“In the long term, real estate has generated high returns while being less volatile than other asset classes in addition to being used as a reliable hedge against inflation.”

Dubai’s real estate has been performing well, despite regional and global economies laid low by the outbreak. In April 2021, the emirate recorded 4,832 transactions worth Dhs10.97bn, the highest value of monthly property transactions in four years. A month earlier, in March, Dubai recorded the highest number of secondary/ready properties transacted in a single month since June 2015, according to Property Finder.

“Real estate has had the benefit of being less correlated with other asset classes such as equities. In addition, as banks are willing to lend against physical real estate, investors have had access to leveraged market returns which can result in a return on physical real estate being quite attractive,” explains Dr Owen Young, regional head of Wealth Management, Africa, Middle East and Europe at Standard Chartered Bank.

“Long term asset class returns analysis in some markets has shown that while equities have outperformed real estate on an unleveraged basis over the long term, once the typical leverage on a real estate investment is included, then the real estate investment can outperform the unleveraged equity investment. The challenge with the traditional real estate investment is that it is illiquid and  the investor is exposed to single asset risks. Also, the typical investor can only invest in a small number of real estate investments.

“The alternative is to gain exposure to real estate via market investment vehicles that pool funds across many investors and invest in many different properties. These vehicles allow the client to have far greater liquidity and the asset manager is responsible for managing the properties,” he adds.

Cryptocurrencies: Digital cash 
As digitalisation drives pick up pace and investors scour for new avenues to park funds, alternative investments are gaining momentum. Cryptocurrencies rallied this year buoyed by institutions embracing digital money and rising investor interest. Electric car manufacturer Tesla disclosed an investment of $1.5bn in bitcoin earlier this year (although Tesla chief Elon Musk last month announced that the car manufacturer would stop vehicle purchases using the cryptocurrency, citing its environmental impact).

Meanwhile, US-headquartered Square acquired $50m in bitcoin last year, which it doubled with an investment of $170m in February 2021.

“The price rally in cryptocurrencies since 2020 has triggered an increase in interest including institutional investors and corporates’ interest in cryptocurrency. However, institutional participation is still quite limited. Central banks’ unprecedented money printing and governments’ fiscal response to the Covid-19 pandemic has fuelled worries about currency devaluation and inflationary spikes. These developments have reinvigorated bullish narratives around digital currencies, driving increased interest,” explains Young at Standard Chartered Bank.

“In the meantime, central banks across the globe continue to investigate the merits of digital currencies and the use of blockchain for monetary policy use. Investors with a high-risk appetite might be interested in building exposure to this area of markets, either as a hedge or as a speculative investment.”

Despite economic volatility, bitcoin witnessed a record surge this year, hitting a high of close to $65,000. Meanwhile, the cryptocurrency market reportedly topped $2 trillion in value in April, according to data from cryptocurrency data aggregator CoinGecko.

But are regional investors keen on cryptocurrencies as a potential asset? Pernot responds: “As cryptocurrencies, mainly bitcoin, have soared and taken centrestage in every market discussion, the riskier investors have shown some interest, but more so as a short-term speculative trade, due to the lack of depth and regulation around it. This ‘asset class’ is gaining traction from regional investors but is a long way from being mainstream and being officially classified as an asset class. Investors currently view it as a speculative tool that cannot be valued and which is extremely volatile.”