ASSET MANAGEMENT FOCUS: Overcoming the challenges

HurdlesFunds Global talks to local asset management firms and investment banks about the market in Qatar and how it can be developed to meet international best standards. The asset management market is at a nascent stage of development in Qatar, just as it is in other areas within the Mena region. However, the tendency to view the Mena market as a homogenous whole should be resisted, especially in the case of Qatar where the underlying economics are markedly different from many of its neighbours. Dubai, for example, suffered a damaging exodus of investors following the restructuring of state-sponsored property scheme Dubai World in November 2009. There has been a recovery since, most noticeably in the successful bond issuance from Emirates, the Dubai-based airline, which attracted more than $6bn (€4.2bn) in orders. Yet there remains nervousness among investors. Furthermore, recently announced proposals from the state regulator the Securities and Commodities Authority (SCA) has caused some uncertainty at both a domestic and international level. Local asset managers fear that an extra layer of regulation and the lack of distinction between retail and institutional investors will make the launch of new funds too expensive and play into the hands of larger local banks.  Additionally, international asset management firms are worried that the SCA’s proposals have been poorly put together without proper consultation and could be just the beginning of a series of regulatory measures designed to favour local banks over international institutions. Consequently, any international firm considering the launch of a new Mena-based project may be looking at domiciles other than Dubai. Meanwhile in Bahrain, the outbreak of civil demonstrations earlier this year has led investors to consider the political risk attached to any investment activities in the domicile. To be considered too much of a political risk to be awarded a Formula One race by the far from scrupulous world of motor racing is a damning indictment. In contrast, Qatar appears to be more politically stable than Bahrain and perhaps more forward-looking than Dubai in its plans to develop an international asset management industry. This is not to say that Qatar does not have its own challenges. While the necessary framework (international standard regulation; a technically sophisticated exchange; and solid underlying economics) is all there, a thriving asset management market will not appear overnight. And while it may be relatively easy to entice international firms to set up a marketing office in Qatar, the real intention is to encourage them to establish their manufacturing arms and Mena headquarters in Qatar. Most of the established names in asset management will already have set up a head office in the region and it is unlikely many would want to uproot an existing office. To date, the QFC Authority’s development strategy has been based on encouraging organic growth rather than enticing firms through financial inducements. A considerable sum has been invested in establishing a solid infrastructure that meets international standards. And asset management has been singled out as one of three areas of particular focus. Now it has been built, Qatar must wait to see who will come. Economic dynamics
Shahzad Shahbaz, chief executive officer of QInevst, one of the largest investment banks in Qatar, believes the QFC Authority is right to focus its development efforts on the asset management and insurance sectors rather than trying to position Qatar as a financial centre that is all things to all people. Furthermore, a service like asset management is particularly suited to the economic dynamics of Qatar where there is a surplus of capital. Public equity remains the most popular investment vehicle in the region and QInevst offers over 100 funds as part of its Mena offering along with discretionary portfolio management. Following the financial crisis, high-net-worth individuals in the region are more willing to give their capital to an investment manager rather than managing themselves. It is still a tough environment to raise capital for private equity investments and the going has been equally slow for syndicated transaction in the credit space. “There is surplus capital in the region so yields are down because there is too much money chasing too few opportunities,” says Shahbaz. And in real estate the demand among local investors is to invest directly in the properties, not through funds.  There is a demand among Qatari investors for small sophisticated investment products but asset managers and investment banks are somewhat limited in what they are able to offer because of the market’s restrictions, says Shahbaz. “For example, shorting of stocks is allowed but there are a limited number of asset classes, particularly derivatives.” There is also an inherent sense of caution among investors in the region which increased in the wake of the financial crisis and although a corner has been turned in terms of the economy’s recovery from the crisis, that sense of caution remains. Nevertheless, Shahbaz is confident that the domestic market will develop over time and this will in turn bring in more international investors to the region. Much talk has been made of the need for the QFC Authority to offer some kind of incentives to the international asset management firms that it wants to attract to the country but, says Shahbaz, once a market goes down such a route, the consequent development can only go so far. “Ultimately, those firms have to believe that the market will develop over the long term and that takes more than just seed capital. “I think organic growth in the banking and asset management sector is fine, there is no need to push things further than they need to be. There is everything here in Qatar for it to succeed in the long term – the exchange, the universities, the level of education is increasing. Ten to fifteen years ago Qataris had to go abroad to get an education but now they can do all of that here. And more Qataris are working now, even the rich ones.” The First Investor (TFI), the largest Qatari closed shareholding investment banking firm, is owned by Barwa Bank which is planning to go public later this year. TFI’s activities are centred on real estate investment, investment banking and asset management, all in compliance with Shariah laws. TFI Asset Management is planning to launch the First Investor GCC Equity Opportunities Fund later this year. Investor interest
“The initial investor interest is likely to come from large corporate institutions, government and high-net-worth individuals,” says Robert Pramberger, acting head of asset management.  A lot of capital of the region stays within the region, such as government spending on infrastructure projects, real estate, creating a financial hub, projects within education and research, sports, medical and hospitality. The discussions about a possible MSCI upgrade of Qatar from “frontier” status to “emerging” status would improve the flow of capital coming from outside of the region, says Pramberger. “This could bring in around $4bn of new capital. However, the inflow would be spread over a one-year period until implemented.” As well as the MSCI upgrade, the other big impetus for Qatar’s financial market was the awarding of the Fifa World Cup 2022. The impact has been felt across the country says Pramberger. “Real estate and infrastructure projects that were moving slowly have now been given a higher priority and will be completed much faster. The underground and tramway project has started and we can already see the implementation progress. The next ten years will be all about completing these infrastructure projects.” In the case of a successful MSCI upgrade in Qatar, the inflow of new investments should be a positive and generate more trading volumes and increase liquidity on the Qatar Exchange. The momentum has already been picking up in Q1 of 2011, says Pramberger. An increase of trading volumes in Qatar should also be positive for international investors increasing their exposure to Qatar as trading in and out of stocks becomes easier and quicker. Stocks with low liquidity are normally ones which portfolio managers avoid as selling these becomes impossible when markets fall. “We are also likely to see more IPO’s this year and a possible increase of foreign ownership levels,” says Pramberger. Qatar is focusing on attracting new asset managers to set up their base in the country, says Pramberger. “Regulations of setting up asset managers in Qatar are constantly improving. It is also talking about injecting money into asset managers if they are based in Qatar, which in the current market would be a very big incentive. Stability is also one of the best in the region. A telling sign is that credit default swaps spreads are the lowest since the beginning of the year.” ©2011 funds global

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