Investors in the Middle East consider the tools that will be needed to navigate the Covid-19 crisis, the continued appetite for dividend and why it’s all about tech. Chaired by Romil Patel.
Scott Dickinson (regional head, securities services, Africa and Middle East, Standard Chartered Bank)
Ahmed Talhaoui (head of Middle East and Africa and fixed income product strategy, EMEA, BlackRock)
James Grist (head of group distribution, MENA, HSBC Bank)
Peter Duke (head of Middle East and Africa intermediary sales, Fidelity International)
James Stull (partner, corporate finance and investments, King & Spalding)
Firas Mallah (managing partner, MMK Capital)
Funds Global Mena – What are your investment objectives over the coming 12 months and which asset classes and themes are you targeting?
Scott Dickinson, Standard Chartered – Right across the region there’s a lot of uncertainty. Underlying stock markets are not necessarily as bad as they could get, but generally speaking, there’s a broad recognition that economies are shrinking, and that brings real challenges from an investment point of view in terms of what asset classes are most appropriate. We may see a slight movement away from passive products which have been very dominant on a global basis, with the potential for some more active management in two particular sectors: equity, where one imagines in these times there is value for the informed investor, and also in the high yield bond market; mainly in sub-Saharan Africa, less so in the Middle East.
From the regional investors, particularly at the sovereign level, there’s a realisation that they are probably one of the few investors on the planet at a time like this where, with a combination of the resources at their disposal and the long-term investment horizons, they can actually make a difference to some of the challenges that have an investment element. Before Covid-19, people were concerned about what’s happening to the planet in terms of pollution, etc, and we’ve seen a shift in sentiment, towards the more social responsibility aspects of investing such as green and blue bond issuances. Perversely, at a time that’s probably been the most challenging in most people’s working lives, the ESG [environmental, social and governance] element is going to play a greater role in investments as the ability to achieve investment performance may not necessarily be the sole priority.
Ahmed Talhaoui, BlackRock – The current situation that we are facing is unique. We essentially have governments purposely shutting down economies because of something unprecedented, so that brings a lot of uncertainties. Fortunately, as opposed to the great financial crisis of 2008, the financial ecosystem is functioning and robust, but having said that, there are significant question marks about where growth is going to be six to 12 months from now, so it’s extremely difficult to formulate a direction on where the markets are going to be. However, what can be done in this environment is to prepare for some flexibility, and that’s what a lot of our investors – whether retail or institutional investors – are looking at. Diversification comes in different dimensions. There is obviously a traditional diversification that you obtain through asset allocation and the question mark is how much fixed income and equity you need to own.
There are structural dislocations that have appeared, differentiations in equity markets and in the fixed income space about whether you have an easier access to capital or not, where you sit in the capital structure. That would create alpha opportunities that are juicier than what we’ve seen in recent years. At the same time, another dimension is to decide where you want to be active and where you want to have an exposure which is efficient in order to capture the market rebounds. One aspect that needs to be considered is to think about where you want to be active and where you want to index – indexation is an active decision. That is the toolbox that our investors will need in order to navigate in the next 12-18 months.
There is going to be a big question mark on fixed income, but I am not saying that fixed income markets are going to be facing a bear cycle, because people have been saying that for many years and were buried under a wrong assumption that this is going to be the end of the bull market. However, we have to be realistic about one thing: we had a consensus around a beginning of the normalisation of the monetary policy in the US that the Federal Reserve (Fed) was trying to do, and we’ve now seen a very sharp reversal, so now we are in the situation where yields are low everywhere. They can go lower, that’s a lesson that we have learned from Europe and Japan, but it means that our investors need to rethink how they want to get exposed to fixed income. As an example, it could be an income approach in terms of capturing opportunities from an idiosyncratic point of view in fixed income, but it’s time to do more work in thinking about how to explore the opportunities there.
Coming back to the toolbox I mentioned, being active or index-based on what you want to do, using factor exposure, are tools that can work for clients in this environment, specifically given the fact that some factors have experienced a lot of volatility in terms of how they’ve behaved, hence it can be an interesting time to reassess how much value and growth you want in this environment.
James Grist, HSBC Bank – Within a diversified portfolio we see China and industrialised Asia as having value and being relative winners, with relative losers being emerging markets ex-Asia, frontier economies and the UK. Over the longer term, we favour riskier asset classes, within that, particularly global high yield and Asia high yield and selected equity markets. On global investment grade, we are selective, favouring assets supported by central bank policy, and whilst downside risks remain with downgrades and defaults, spreads remain higher than the start of 2020.
Within portfolios, different forms of diversification, both in alternatives and ESG particularly, are increasingly important. We are going to have to look at the traditional multi-asset portfolio, which has relied very much on fixed income for diversification, and alternatives can act as return enhancers and also provide diversification. Factor exposure is one area that we include in our portfolios as well as asset classes such as securitised credit. Post-crisis, increasingly ESG considerations in portfolios are an important consideration for diversification. We will need to think harder about the way that we diversify portfolios.
Peter Duke, Fidelity International – In March, you didn’t need to buy distressed debt to get a good return. For example, many high yield credits with good fundamentals were priced at a level which suggested distress and default. Bringing this back to Middle East investors, the mindset is very much still focused on income; as we know, often that’s enhanced with leverage, which unsurprisingly has caused some challenges during the unwind.
For the next 12 months, the themes are likely to be the same as they have been for the last 12 years. Security of income is one consideration, and that perhaps pushes you towards investment grade, both in the US because it’s supported by the Fed’s stimulus packages, but also to Asia, which is probably on a sounder footing economically.
The other key consideration for Middle East investors is the level of income, which has historically meant exposure to Asian high yield, China high yield and emerging market debt. There remains a lot of support for China, but a weaker US dollar also makes other areas of emerging market debt attractive, as US interest rate differentials have fallen away.
Whether we like it or not, fixed income is the preferred asset class for most investors in the region. Different sub-sets of fixed income or potentially alternatives in some form are the ways investors look to diversify or de-risk some of that exposure.
James Stull, King & Spalding – I sit more on the private side representing asset managers, private equity and real estate, but also families and sovereign and institutional investors with their private investments. We know that a large amount that was being allocated towards fixed income on the private side and real estate has historically been the asset class of choice. In the Middle East, we are not seeing many people wanting to invest in real estate at the moment and globally, we see the core assets that are going to be producing this income. The US and Europe is where we have seen a lot of money go into real estate, and with the price of oil, we saw a lot of money going out. When Covid-19 hit, we saw that almost grind to a halt. Real estate is not the asset class of choice for the time being, but it has just come back to life over the last few months where we’re seeing a lot of outbound investment into it.
Private equity, at least in this region, has come to a complete standstill, but we have seen a lot of investors interested in investing in private equity outside. The one asset class that I have consistently seen drawing interest is technology. In this region, tech, whether it’s government or families, everyone is getting comfortable with it.
Firas Mallah, MMK Capital – There is still an appetite for dividend here, and we have essentially seen two buckets. There’s a demand for dividend and the persistent appetite for dividend, mostly on the classic asset classes – high yield debt, distressed debt, private credit and all the spectrum of risk in the private debt area. Also, within real estate, all the dividend-yielding investments such as retirement homes in some of the more socialist countries, where it’s guaranteed by the government income, or by the retirement pension of pensioners. Some of the plays in real estate are more attractive, like logistics, particularly as part of supply chain management or anything that relates to technology infrastructure, data centres, or anything that supports this big drive in teleconferencing and the demand on data.
On the growth side, it’s tech, tech, tech. Everybody wants to be in tech and a lot of people want to be more directly in tech rather than through funds. We’ve been doing a lot of the co-investment approach where we put a ticket in the fund and then we get a co-investment privilege or first right of refusal, because we find it is too risky to just go directly internationally. Locally, you get a lot of view on the deal flow, but once you step out, there is no guarantee of getting a decent deal or a valuation on a direct tech, so it’s always important to be hand-in-hand with the right player outside.