Could the global financial crisis be a blessing in disguise for the Middle East region?
Could the global financial crisis be a blessing in disguise for the Middle East region? Certainly, industry players and governmental agencies in the region are rubbing their hands with glee, as seasoned foreign investors, failing to find any kind of rhythm in developed markets, are seeing the Middle East as their new investment Mecca.
As the markets in the region have almost no correlation to other major asset classes or countries with developed market equities, and as other emerging markets seem to falter amidst the reverberations from the West, the Middle East has been given a double investment boost. This is in addition to the factors already contributing to its growth, including the wealth created by the oil price boom over the past few years, the rapidly developing financial centre infrastructure in jurisdictions such as Dubai, Qatar and Bahrain, and the rising commercial property prices.
As a result, droves of foreign investors have entered the region in the past year or so and many more are planning to do the same. In a recent conference in Dubai, senior executives of the world’s largest private equity firms were present.
Participants at the ‘Super Return’ conference included Henry Kravis, co-founder of Kohlberg Kravis Roberts, Stephen Schwarzman, a co-founder of Blackstone Group and David Rubenstein, a co-founder of Carlyle Group. Rubenstein, whose firm opened an office in Dubai two years ago and is investing a fund that targets the Middle East, said the region is among markets that will weather the financial crisis.
"The economic growth is being sustained by non-oil sectors," Rubenstein said, noting that most governments in the region set their budgets based on oil prices at about USD 50 per barrel. "It will likely trend up more than that, and the Middle East governments have amassed huge foreign reserves. I don’t think they’re as vulnerable."
But these private equity gurus are not the only ones upbeat on the Middle East. Interest has been coming in steadily from investors and financial service companies across the board. And the serious efforts to establish competing international financial services centres in Dubai, Abu Dhabi, Bahrain and Oman are facilitating the needs for these entities to come in and do business in the region.
Merrill Lynch is aiming to boost its Middle East business, according to chief executive officer John Thain. The US investment bank, currently being taken over by Bank of America is "committed" to expanding its wealth management, investment banking, sales and trading activities and has applied for licenses to enter Qatar and Kuwait.
Morgan Stanley, JP Morgan Chase, Goldman Sachs Group, Credit Suisse Group, Citi and Barclays have also opened regional offices in the Middle East, mostly in Dubai, in recent years. Dubai, with the help of the Dubai International Financial Center (DIFC), has been working hard to attract serious investors over the years. It is interesting to note that workers moving to the region get a big perk: no local taxes on their six- or seven-digit pay packages. Indeed, one of the most immediate and attractive aspects of working in Dubai is that fact that there are no personal taxes levied against income from employment, adding another alluring aspect to the region.
All this has also helped transform the DIFC, a 110-acre office sprawl in the heart of the city, into some of the world’s most expensive commercial real estate. The continuation of Dubai’s economic growth and diversity is still attracting new businesses, making the commercial property sector another factor in the country’s economic diversification. Unlike the retail property market, where there is a high degree of oversupply, demand continues to surpass supply in the commercial sector.
The International Monetary Fund (IMF) in its October 2008 Regional Economic Outlook on the Middle East and Central Asia region outlined that the MCD region has continued to experience strong growth in 2008, outpacing global growth for the ninth year in a row.
Growth is underpinned by high commodity prices, strong domestic demand, and also credibility of the authorities’ economic policies. So far, the Middle East and Central Asia region has been largely resilient to the ongoing international credit crisis and the downturn in the US and other advanced economies, said the .
The factor that markets in the region have almost no correlation to other major asset classes and markets favoured by international investors is crucially important. Experts have said that over the past few years, Middle Eastern equity markets have exhibited practically zero correlation to Latin America, US and other developed market equities, and only most modest positive correlation to other emerging equity markets, thereby giving it a unique selling point in the eyes of potential foreign investors.
Foreign investment comes in many forms but that from hedge funds has been streaming into the region of late. Earlier in the year, Deutsche Bank’s annual alternative investment survey confirmed that investors surveyed said they planned to increase their allocations to emerging markets, with the Middle East predicted as the top performer amongst all regions. By region, about 45% of investors surveyed said funds investing in the Middle East and North Africa will be the top performers in 2008.
This has since taken some form of concrete investment and funds are already getting into the action. Interest in hedge funds has risen in the Middle East and many firms are seeing a trend in regional interest in commodities hedge funds and distressed securities, which are investments made in companies filing for bankruptcy protection that are often viewed as a bargain.
Reports have stated that Michael Spencer, founder of inter-dealer broker Icap, is ploughing tens of millions of dollars into a new hedge fund to profit from frontier markets in Africa and the Middle East amid a rush of money into the region.
Man Investments also successfully launched a USD 1.5bn environmentally friendly hedge fund in June in conjunction with the Abu Dhabi Government-owned International Petroleum Investment Company. Also, as part of its Middle East expansion plans, Deutsche Bank plans to launch a sharia-compliant hedge fund platform.
From a service provider perspective, the Middle East is set to become a major source of business in the future. Bigger firms that are able provide a range of services to a diversified client base, are already finding it to be an attractive location in which to function. As the global hedge fund industry starts to feel the vibrations of the global financial turmoil, the Middle East is poised to show increased hedge fund activity, since the region’s economies are on a separate growth cycle from the West.
In terms of finance centre jurisdictions capable of handling the rise in financial services and alternative investment growth, there is no doubt that the centres in the Middle East are well-equipped.
Take for example Bahrain. Only recently, Citi launched its securities and fund servicing business in the Middle East, with the announcement that the bank is ready to provide fund administration and related services to regulated funds in Bahrain. The bank said the move was a response to demand in Bahrain for "an increased choice of local service providers with capabilities covering all investment strategies" including alternative fund styles.
Funds registered in Bahrain had around USD 15.6bn in total assets under management as of December 2007, up nearly 73 per cent on the previous year, according to figures from the Central Bank of Bahrain.
There is also talk that the DFIC, with its new legal framework, would be able to attract business away from the Cayman Islands. If this does happen, even on a small scale, the flow of assets coming in would still be significant enough to justify Dubai as a strongly competitive funds jurisdiction.
Although the vast majority of funds managed in established centres of hedge fund activity such as London, Singapore or Hong Kong are domiciled in the traditional offshore jurisdictions – most notably the Cayman Islands, Dubai, with its new-found expertise could prove to be a strong alternative.
As opportunities in the region increase, hedge fund managers are seeing an interesting territory that can offer them an oasis in these times of financial crises. The Middle East is a unique market place – one demanding local solutions with global service standards. As domestic investors seek diversification from the traditional investment areas such as private equity and real estate, the hedge fund sector will stand to benefit.
Also, new initiatives by financial regulators, the changing investment environment in the region and the dynamism of local markets have made the region an attractive market for hedge fund providers. Investors seeking to access this increasingly important emerging market block may be coming in at the right time.
