Surveys
MidEast Investors Cagier As "Arab Spring" Turns Less Springlike - Invesco
Global economic uncertainties and the souring of the so-called “Arab Spring” are driving investors in the Middle East to be more cautious and put a bigger premium on income, a new survey by Invesco shows.
The asset manager’s third annual survey of Middle East investor opinion shows that risk appetite has fallen and investors have become increasingly disappointed about returns.
Across the Gulf Co-operation Council region, it was found that short-term interest rate differentials between Gulf-based markets and others were a key driver of behaviour.
Upheavals in jurisdictions and countries such as Bahrain, Egypt, Tunisia and Libya have rattled investors. Among expat Arabs, for example, their bias towards home markets (defined as “excess” allocations) shrank from 27 per cent in 2011 to 10 per cent this year. Among GCC locals, the bias dropped slightly to 54 per cent in 2012 from 55 per cent in the previous year. The only group that saw a slight rise was among non-resident Indians, up to 37 per cent from 31 per cent.
A net 21 per cent of all investors in the survey said they were disappointed at the outcome of 2012 in terms of forecast target returns, against a net 14 per cent who were pleased about forecast target returns last year.
The gap between interest rates paid on bonds in parts of the Middle East and the West is stark. Between last year and 2012, Arab expats have boosted exposure to relatively high-yielding domestic fixed income to 12.4 per cent of asset allocation from 2.8 per cent in 2011, a jump of 338 per cent. To illustrate such a move, a 2017 maturity bond issued by Dubai Holding yielded 10.1 per cent, while a 2017-dated US Treasury bond yielded a meagre 0.83 per cent.
The survey was based on more than 100 interviews, of which 20 were with family offices, Invesco said. Among other details, the survey showed that investment time horizons for non-resident Indians have shrunk from 5.7 to 3.5 years compared to 2011, not surprising given a high preference for liquidity. This segment has the strongest target returns (9.6 per cent), a likely reflection of their expectations when investing back into their home emerging market.
“This year it [the survey] shows us that retail investors are aligned in their search for income, however each segment favours different asset classes based on their individual appetite for risk and returns. This is vital intelligence when it comes to understanding the types of products that should be made available to these groups,” Katie Saha, associate director, international third-party distribution at Invesco Asset Management, said.
"We now know that risk appetite has reduced for some investors in the region. There is therefore a clear need to maintain and build dialogue with our intermediaries in the region who can, in turn, educate investors and manage expectations," she continued.
“It also gives [advisors] an idea about different allocation preferences in different groups. The low interest rate environment has fuelled this search for income and this is combined with a preference for lower-risk assets. Our research suggests that any new products being put forward could benefit from offering exposure to quality sources of income and relative security," she said.
“Non-resident Indians view cash as having an attractive relative yield as well as being a more risk-free asset, thus leading them to allocate more to Indian based deposits. However, there is growing concern about currency risk. The Indian rupee has continued to depreciate year-to-date versus the dollar, so this is expected to have a negative impact on NRI dollar-based savings, therefore you have a double edged sword, winning on the yield front but losing on the currency. I do believe we need to see markets stabilise before we see a strong allocation to funds again,” Saha said.
Among Western expats, there was an increase in allocation to global fixed income from 14 per cent in 2011 to 18 per cent in 2012; this is a general reflection of the low interest rate environment and trends around searching for income and a need for relative security.
A strong year-on-year demand for international life wrappers also continues to prevail, accounting for 62 per cent of Western expat portfolios, with single premium products forming the largest share (37 per cent). Demand for structured notes has also seen a rise from 7 per cent last year to 11 per cent this year. Western expats are the only segment to see an increase in time horizons from 6.7 years to 7.5 years, while home market investment bias has remained very similar to 2011 (22 per cent).