With interest rates lingering at unprecedented lows across a number of developed markets, institutional investors are scouring emerging economies – especially those in the Middle East - for alpha. Scott Dickinson, Managing Director, Regional Head, Financing and Securities Services, Africa and the Middle East at Standard Chartered, shares his insights into some of the changes currently sweeping through the GCC.
A region abuzz with activity
Although emerging economies were disproportionately impacted by COVID-19, many of them – including here in the GCC – have enjoyed a better than expected recovery, with the region attracting renewed investor interest. Accelerating investor inflows into the GCC has been the region’s buoyant IPO market.
In Saudi Arabia, there were nine listings in 2021 on the Tadawul including that of the exchange’s parent group – the Saudi Tadawul Group Holding Company, which raised $1 billion in the biggest exchange IPO since Euronext went public in 2014.1 Already in 2022, there are three IPOs scheduled to take place in Q1.
As a result of this flurry of activity, the Tadawul’s market capitalisation increased exponentially in 2021 and now totals $2.8 trillion, while it is also ranked as the 17th largest exchange in the world in terms of liquidity.2 Similarly, the Abu Dhabi Securities Exchange [ADX] saw a resurgence of listing activity in 2021 including a high-profile IPO by ADNOC Drilling, which raised $1.1 billion – the largest ever listing on the ADX.3 As a result, ADX’s market capitalisation jumped exponentially, and now totals $370.31 billion.4
Dubai, having staged just one solitary IPO since 2017 – announced on November 7 that Dubai Electricity & Water Authority will go public in what could turn out to be the city’s largest listing to date, with the company being valued at $25 billion. Bloomberg reports a further 10 state businesses in Dubai could IPO - while family owned firms are also being encouraged to list as well.5 That so many of these IPOs are oversubscribed is indicative of the surging investor interest in the GCC region.
Getting the investors into the GCC
Amid the challenging macro headwinds and FX risk in certain other emerging markets, the GCC – owing to the fact that its currencies are pegged to the USD – is seen as being a more stable investment destination. The region has also made it easier for investors to gain entry into the local markets. Sparked by the oil price collapse back in 2014, GCC markets have doubled down on their reform efforts as they sought to diversify their economies beyond commodities and attract foreign investors into their domestic markets. A number of countries – such as Saudi Arabia - which hitherto were very difficult to access have since loosened their entry requirements for foreign institutions. They did this – for example – by reducing minimum AUM [assets under management] thresholds for qualified foreign investors [QFIs] while also easing restrictions on foreign ownership of domestic securities. In addition to opening up their capital markets to foreign investors, several GCC economies have introduced new products for institutions to trade.
Having created a framework to support securities lending and borrowing, the ADX launched a derivatives market in November 2021 [along with a central counterparty clearing house {CCP}], allowing investors to trade single equity futures. This comes more than one year after Saudi Arabia inaugurated its own derivatives market and domestic CCP. By launching new financial products [and financial market infrastructures], GCC countries are enabling foreign investors to better hedge their risk, which will be vital in helping to attract inward investment.
Barring the dislocation inflicted by COVID-19 in 2020, investor flows into the GCC have been largely solid since the region started implementing its ambitious reform measures. Positive market liberalisation initiatives have been a major driver behind the inclusion of the UAE, Qatar, Saudi Arabia - and most recently Kuwait - onto the various global indices, a result of which is that these countries have experienced significant inflows from a number of passive and active fund managers tracking these benchmarks. Although large global institutions have piled into the GCC markets recently, a lot of the transactional activity currently taking place is being fuelled by regional cross-border investors.
Barriers to entry still an issue
While several markets in the GCC have made extraordinary progress by opening themselves up to foreign investment, issues do remain. Accessing the GCC as a whole can be difficult as the account opening processes in individual countries are not harmonised. For example, cross-border investment in the region is partly precluded by the absence of transferable NINs [national investor numbers] making it harder for allocators to build up positions across multiple markets. Such complexities are sometimes off-putting for foreign institutions.
Other impediments are perhaps more serious. Geopolitical risk continues to be an ever-present problem in the GCC, while some institutions increasingly baulk at what they perceive to be inadequate levels of transparency from corporate issuers – although efforts to strengthen bilingual reporting, for instance, should be applauded. And finally, with more investors being pressured into incorporating ESG [environment, social, governance] metrics into their asset allocation strategies, the GCC could find itself disadvantaged as so many of its corporates either participate directly in or are heavily reliant on energy intensive sectors such as O&G.
Going from strength to strength
The GCC is awash with activity – fuelled by a deluge of IPOs and index inclusions - both of which are expediting investor inflows into the region. Facilitating these inflows further has been the decision by a number of local regulators to pursue bold market liberalisation reforms. Despite inflows being healthy, work still needs to be done in the GCC to make entry into their markets even more seamless.
