Eddy Abramo, Regional CEO at Banque Internationale à Luxembourg gives his projection of the wealth management industry in the GCC

Describe the wealth management landscapein the region.

As a result of tremendous volatility in financial markets as well as the low oil price, the beginning of the year was particularly tense. But overall, the growth we have in the region is strong especially compared to any European markets. So even if the economy is not 'booming' capital inflows and investments coming into the GCC and more specifically into the UAE are very strong. The Iranian market will be also very important for the region especially regarding the medium-term impact on the oil price but also in terms of business opportunities for the GCC.

What are the wealth management trends developed in 2015 and how do you see it evolving this year?

In 2015, we had a huge interest in European real estate for several reasons. First, bonds were less attractive than in the past. Also, European real estate is very attractive for GCC investors for two main reasons: the very low interest rate environment in Europe and the weakness of the Euro compared to the US dollar. So overall, real estate was very attractive in 2015 and will continue to be this year, not least due to the lack of alternatives. In addition, private equity which was also very attractive last year will continue to be so in 2016.

What are the biggest issues challenging the sector this year?

Wealth management is really a sector linked to all of the different aspects of financial market and geopolitics. This means the challenges will not go away this year! Some question marks include the continued anaemic growth in the US combined with the election and the geopolitical situation in the Middle East, especially in relation to Syria. As well, the opening of Iran and the resulting financial impact on the GCC, the low-interest-rate and low-inflation environment in Europe, as well as the risk of Brexit are also likely to have a significant impact. So as you can see, the challenges are numerous, to which I will add 'as usual', which means our know-how in guiding and advising our clients in such a treacherous environment will remain critical.

Particularly across the GCC, what kind of developments do you expect to see?

I personally think that the wealth management industry will continue to grow in the region. In fact our sector is linked to the growth of our region. In the GCC, we have growth. The region sees also a lot of 'new joiners' from all around the world. If you have a look to the expected population growth in the region, where else in the world can you have such numbers? [UAE 25 per cent; Iraq 40 per cent; Saudi Arabia 20 per cent; and Qatar 25 per cent]. Therefore our sector is linked to private clients and entrepreneurs. And the GCC is one of the most attractive regions for these client segments. So I am very optimistic for this year and beyond even if we will encounter some turbulence along the way!

What are the opportunities do you see available in the Middle Eastern market?

There are a number of investment opportunities in the region. In the equity space we have a thematic approach with emphasis on companies with strong high quality earnings growth, attractive valuations as well as restructuring plays. We also see opportunities in UAE bonds as the current rally is likely to continue on the back of the rebound in oil prices as well as technical factors whereby demand in the region is far exceeding the available pool of bonds. 

Average credit spreads on GCC bonds have compressed in the recent past due to a revival of risk appetite not only due to higher oil prices but also due to increasing confidence in GCC governments' ability to manage their budget deficits. That said, overall credit spreads are still almost 50 per cent higher than where they were in mid 2014 which appears justified in view of falling credit ratings and likely increase in debt levels in the region.

With a more sombre global economic outlook projected this year, investors are expected to be more cautious in allocating their assets. What is your outlook for 2016?

Risks for the region have receded somewhat due to the sharp rebound in oil prices from their February lows.  The main reasons are lower US production, supply disruptions is some parts of the world and the low level of spare capacity. At the same time demand from China has remained healthy as economic activity is responding positively to renewed stimulus measures.

At the same time, headwinds remain for the region amid the necessity for significant fiscal consolidation. The collapse in oil prices between the middle of 2014 and the first quarter of 2016 has been extremely disruptive for GCC fiscal balances. Fiscal accounts have swung from a surplus equivalent to 3.8 per cent of GDP in 2014 to a deficit projected at 10 per cent of GDP in 2015 and seven per cent of GDP in 2016. In the absence of flexible exchange rates, oil revenues in local currency terms have come down sharply.

Saudi Arabia, the largest economy in the region will run a budget deficit of 13.5 per cent of GDP in 2016 versus 15 per cent in 2015. This is based on an oil price of $35 per barrel. The government has responded with a budget containing spending cuts, subsidy reforms and privatisations of state owned assets, notably parts of Saudi Aramco.  Among the planned revenue increases is the introduction of VAT along with the other GCC countries.

The ongoing weakness of oil prices and the strength of the US dollar are giving rise to speculation in the foreign exchange forwards market that GCC countries in general, and Saudi Arabia in particular, may adjust their long standing currency pegs to the US dollar. While such a move might appear compelling in the current environment, we believe the potential costs would outweigh any short term benefits to fiscal budgets for various reasons. The most important one is the GCC economies' dependence on oil exports. Since oil is denominated in US dollars a devaluation of local currencies would have a limited impact on export competitiveness, which would be eroded by the higher costs of imports within a very short time. We expect the GCC currency pegs to the US dollar to remain in place.

Overall, risk appetite should be on the rise again in coming months, since in our view oil prices have seen their lows and the fiscal challenges in GCC countries are manageable.

© Banker Middle East 2016