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GCC investors look to UAE for local investment opportunities, says Invesco study

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The United Arab Emirates (UAE) is still the main beneficiary of inflows of private capital into the Gulf Cooperation Council (GCC), according to Invesco’s fifth annual Invesco Middle East Asset Management Study.

The UAE saw total private capital inflows of 81 per cent on a net respondent view basis in 2014, compared to 52 per cent last year. Over half (58 per cent) of this capital was seen on a net respondent view to be coming from emerging markets, including Russia and Africa. In comparison, the net respondent view shows most other countries in the GCC to be in net outflow.
 
In the study’s fifth year, the interviews conducted among over 100 industry participants within the main retail segments, including private banks, retail banks and IFAs, confirmed the growing perception of the UAE as a perceived safe haven for private capital. The 2012 study identified the flow of assets from MENA into the UAE as a result of the Arab Spring, and this year’s study cements this observation as the UAE continues to be a beneficiary of capital flows driven by political instability in other regions.
 
Among the most notable large inflows of private capital into the UAE are those coming from Russia and the surrounding CIS (Commonwealth of Independent States). While there have always been links between Russia and the GCC, this year respondents cited an increase in Russian/CIS assets flowing into the region from 10 per cent in 2013 to 17 per cent in 2014 on a net respondent view. This was primarily due to the Crimean Crisis, and when asked about the key drivers of capital flow, 30 per cent of respondents cited local political stability as the most important factor.
 
However, respondents also highlighted the relative risk of a short term reversal of Russian assets if the region stabilises, compared to MENA assets. Whilst the Arab Spring saw expatriate assets and investors moving to the UAE, Russian investors have not relocated and can more easily withdraw their UAE assets at short notice.
 
Whilst geopolitics were identified as a major factor driving capital inflows into the UAE, on the whole, local investment opportunities have now overtaken political stability as the most frequently cited driver of private capital flow. This year, 33 per cent of respondents identified local investment opportunities as the most important factor driving capital, compared to 29 per cent in 2013, with the reverse change in the number of respondents citing political stability as the main driver. Qualitative feedback supported the view that the UAE offers more attractive investment opportunities in 2014 and that the local regulatory environment (including the DIFC) was improving its reputation.
 
Tolchard, head of Invesco Middle East, says: “Our study shows that political stability is a hugely important factor in driving the direction of private capital flow, and the UAE is clearly considered a ‘safe haven’ amidst geopolitical upheavals in the region and beyond. But beyond short term trends, there are strong structural reasons for choosing the UAE as a financial centre. The fact that many respondents attributed capital inflows to local investment opportunities shows that the UAE is becoming an increasingly attractive investment destination in its own right.”       
 
Structural factors being at play when it comes to explaining the increasing inflows of private capital into the UAE is further evidenced by the level of inflows cited as coming from Africa. The study reveals the flows of private capital from Africa are up to nine per cent in 2014 from three per cent in 2013 on a net respondent view. 
 
Tolchard says: “There are historic and growing ties between the GCC and Africa, which ultimately means the UAE is well positioned as a hub for business meetings and private banking between Africa and Asia. We have found that many banks are rapidly building their African divisions and assets under management, and importantly, and in contrast to Russian assets, UAE intermediaries saw African private capital inflows as a longer term more structural trend.”
 
Another trend identified in the study is the small but meaningful shift from Switzerland to Singapore across a range of GCC markets and client segments. In the UAE, five per cent of assets leaving the country were allocated to Singapore, compared to one per cent last year. At the same time, assets allocated to Switzerland reduced from 10 per cent in 2013 to four per cent in 2014. 
 
Many respondents cited regulatory change linked to transparency and disclosure in Switzerland as the main driver around the shift to Singapore. Critically, the study reveals this shift in private capital flow is taking place at the same time as the number of emerging market retail banks in the UAE is increasing, with new offices opening in Singapore, while many Western banks with ties to Europe have withdrawn from the UAE or sold off their wealth management arms.
 
Tolchard says: “While this trend is still small, it is telling of changing shifts in international capital flows and the growing significance of financial centres outside of the Western world more generally – including the importance of the UAE as a hub for financial activity in the emerging markets, in particular.”
 
Overall, the strength of opinion on the UAE and Dubai’s position as a hub for private capital flow was stronger this year, with a net respondent view of 81 per cent in 2014 compared to 52 per cent in 2013
 
Tolchard says: “Whilst challenges no doubt remain, we are encouraged by the findings in this year’s study, and by the fact that respondents told us that, barring a major event or crisis they are positive on the future of the UAE’s position as a credible worldwide financial centre.”
 

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