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Fundamental changes

By John Butcher
November 2011

The MENA region has gone through major changes this year and with it the asset management industry has been forced to shift course. New products are beginning to emerge, countries are establishing themselves as financial frontrunners and the Shariah-compliant niche has begun to enter the mainstream. MENA Fund Review spoke to Pamela Chikhani, head of business information service Zawya's investment opportunities division, about how the industry has changed and how it might develop
The first half of 2011 has been tough for MENA asset managers. Like much of the world, investors in the region have retreated into safe bets to await an improvement in the economic situation. It feels like a long, but temporary, bad patch, before normal service is resumed. But in fact, it could have caused fundamental shifts in the asset management industry that will outlast the global financial crisis, according to Pamela Chikhani, head of Zawya's investment opportunities division.

The worst performing asset class in the first half of the year has been equity funds. The best performers have been trade finance and Islamic funds, followed by money markets and bonds. Most of this is not unexpected given the current economic climate, but the performance and growing popularity of Shariah-compliant funds, which have seen a number of launches in recent months, is.

The driving force behind their performance has been their conservative investment rules, which have proved beneficial in a bear market situation by favouring low debt companies and high quality stocks.

"The laws and regulations that they have in place, somehow when the markets are very volatile and there are bear markets and there is no stability in the market, these criteria and this caution helps Shariah compliant securities, whether funds or any other vehicle, perform better," says Chikhani.

Their strong performance has been coupled with a large number of Shariah-compliant fund launches. In fact, almost all fund launches in the GCC region during the first half of 2011 have been Shariah-compliant. This will help to solidify their already growing place in the region's asset management space.

Saudi Arabia has established itself as the core country for Shariah-compliant funds. There are 243 Islamic funds in the kingdom, the roots of Shariah-compliant fund rules are there, and it is where most fatwas come from. However, the appetite for Islamic financial products is much wider than Saudi Arabia or even the MENA region.

"It's like the new outgrowing niche in the asset management industry," says Chikhani.

Another emerging change is the introduction of exchange traded funds (ETFs). Last year witnessed the first four ETF launches in the MENA region, but volatile market conditions have since halted their progress.

"It's still at the beginning and we are expecting more ETFs to come into the market," says Chikhani. "We expect growth to start flourishing in this area because they will provide liquidity to the market, allow more foreign investments and will help the industry grow faster."

More ETFs are ready to be launched, she says, but have been put on hold until market conditions are more favourable and the current political turmoil has died down.

"With the growth of economies, the price of oil, government support and long term positive sentiment, we expect the second half of the year to be better and perhaps then fund managers will decide to launch them," she adds.

Saudi Arabia and the UAE are emerging as the most interesting countries in terms of investment opportunities, according to Chikhani. The Saudi government has recognised the importance of foreign participation and greater levels of transparency, and with higher oil prices and increasing economic liberalisation there, the kingdom is becoming an increasingly attractive place to look at, she believes.

The UAE has also recognised the need for improvements and is upgrading its regulations to make them more favourable for the fund management industry.

"The UAE has released a strategic investment map that seeks to enhance the investment environment and gives global investors more confidence to pursue opportunities to invest there," she says.

"It has also attracted large investment projects to the UAE. There are a lot of major drives for investors to keep on investing in the UAE. After the crash in the real estate market and the financial crisis some people lost confidence in the UAE, mostly in Dubai, so the government and the UAE ministry of economy are trying to regain all this confidence from investors and are trying to make a favourable environment for them to come back and invest in."

Economic confidence in the MENA region as a whole has been dented by the ongoing Arab Spring. However, the damage has been less than expected, according to Chikhani. The MENA region recorded a loss of around $3bn net outflow between the fourth quarter of 2010 and the first quarter of 2011, according to Zawya's latest figures.

"To be honest with you, I expected it to be higher than that given the political turmoil and the instability that we faced at the beginning of the year in the region," she says. "When we faced the financial crisis a few years ago we lost more than that in the fund industry. Compared with the financial crisis it's not that bad. I feel sentiment could be regained in one quarter."

While all countries across the region have suffered, it has been something of a tale of two halves. Individual countries have been impacted much more severely than others and in the long term some states may have made gains, according to Chikhani.

Bahrain, which has gone to great lengths to develop itself into a financial centre in recent years, was hit hard as a result of unrest. Conferences and companies pulled out, many of them moving to Qatar or Dubai, which in that sense benefited.

Bahrain remains an easy place to do business with a friendly regulatory environment, but sentiment has been severely damaged.

"If people are not comfortable going and working there because they fear for their security or they fear that it is unstable, no matter how favourable the laws and regulations are and no matter how much business there is, they will still think twice about it and if they have other options they might opt into them," says Chikhani.

While there are long term positive trends in the MENA asset management industry, there remain significant hurdles that could hold back industry development and stunt a return of investor sentiment.

The unstable political situation across much of the region and contagion of unrest that has spread rapidly between states is a serious concern for investors. The failure to increase levels of transparency and disclosure also remain issues.

In addition lack of diversification could prove a problem going forward, according to Chikhani. The region is "too concentrated" in oil and petrochemicals, she believes and could suffer severely if these industries were to decline in any way.

For the fund industry to flourish, local investors need to become more educated about the benefits of using asset managers, she adds. Many remain set on investing themselves, despite the recent economic turmoil.

In addition, the Middle East and North Africa needs to produce more talented financial professionals. The region is, "still struggling to find the right talent and this is not helping with the growth of the fund management industry," she says.

Despite these challenges, Chikhani believes, given the underlying shifts in the MENA asset management space, that 2012 will be a much-improved year, marked by growing confidence in the region's prospects.

There is huge potential for assets under management to rise, and this could see a welcome boost if the UAE and Qatar receive MSCI emerging market status in December.

© MENA Fund Review 2011