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JURISDICTION PROFILE: Saudi Arabia Investment Inflows Surge; Family Offices, Private Banks Evolve - Invesco Study

A study of the GCC region of the Middle East notes a change in the investment fortunes of Saudi Arabia, while the UAE remains the biggest draw for foreign investment. The study also reflects on the local family office and private banking market.
The decision by the Saudi Stock Exchange to open its doors to
foreign institutional investors in June has boosted capital flows
to the Gulf Co-operation Council region, an Invesco study issued today
says. The study also highlights growth potential for private
banks and family offices in the region.
The findings come from the US firm’s sixth annual Middle East
Asset Management Study, which is based on 167 interviews with
institutions such as family offices, banks, advisors and
sovereign wealth funds.
Last year’s study found the United Arab Emirates, with its
perceived “safe haven” status and strategic position as a hub
between Asia and Africa, to be the main beneficiary of inflows of
private capital into the GCC region.
However, while the UAE remains popular as an investment route,
with 73 per cent of respondents saying that investable assets and
people are in net inflow into the UAE (compared to 89 per cent
last year), this year’s study reveals a remarkable turnaround in
the net respondent view scores on the direction of capital flow
to Saudi Arabia, from -17 per cent last year to +61 per cent this
year. This is significant in the context of low global oil prices
and declining government surpluses in Saudi Arabia, the report’s
authors said.
Bahrain has also seen a notable turnaround in sentiment on
capital flows, moving from a 73 per cent net negative view score
last year to a positive score of 27 per cent for 2015; the
report said there is a “causal link” because of
its partnership with Saudi Arabia. Although Bahrain’s local
political unrest has declined, helping sentiment, survey
respondents said Bahrain is no longer a major financial centre
and its fortunes are dependent on its neighbours.
Saudi Arabia
The main cause of investment flows in Saudi Arabia was greater
optimism about its economy and the opening of Saudi capital
markets, the report said.
Stock market performance and opportunities to participate in IPOs
were named as the second most important drivers behind positive
perceptions of capital inflows in Saudi Arabia.
Furthermore, 2014 saw some of the largest IPOs in the region,
notably National Commerce Bank in Saudi Arabia and Emaar
Malls in the UAE. Overall deal value for IPOs on the Saudi Arabia
stock market rose in 2014 and is approaching the levels seen in
2007 - before the global financial crisis.
“Our conversations in the region show that whilst there has been
optimism surrounding the regional economy and capital markets,
concerns such as the oil price and government finances persist,”
Nick Tolchard, head of Invesco Middle East, said.
“Whilst things can change quickly in the Middle East, it will be interesting to see if positive sentiment amongst local, especially Saudi, investors translates into reality over the next 12 months and whether the anticipated effects of the opening of capital markets take hold,” he said.
On the other side of the ledger, there have been falls in investment flows from emerging markets, such as Russia, to the GCC region. Last year’s study showed inflows from emerging markets at 58 per cent, dropping down to 41 per cent this year. The fall in the value of the rouble has hit Russians’ financial clout.
Family offices and banks
In a separate part of the report, Invesco said there are
opportunities for private banks in the region to develop “more
strategic” relationships with family offices.
The report also noted that what it sees as positive business
sentiment, driven by strong stock market performance and
high-profile IPOs in the GCC region, has reinforced the
reluctance of family businesses to transfer assets into personal
accounts.
In terms of rooms for improvement in how family offices operate,
Invesco said the “biggest capability gaps are custodial services,
with importance rated at 6.8 out of 10 and performance rated at
5.6, and succession/estate planning [at] 6.8 out of 10”.
There are signs of more formal family office models being
developed. “As the beneficiary structures of GCC families become
more complex with each generation, there is a greater awareness
that governance and ownership structures need to change. As a
result, the profile of family office participants is changing,”
the report said.
“We note also that there is a year-on-year trend towards further
outsourcing (from 45 per cent last year to 53 per cent in 2015)
with an established family office in our study shifting to a
fully outsourced model this year,” it continued.
Local and international
“Local banks (defined as banks with head offices in the GCC) are
now investing in their private banking propositions. They are
developing specific GCC offerings for succession planning,
expanding their range of offshore domiciles and pricing
aggressively. International private banks (defined as banks
servicing high net worth clients with head offices outside the
GCC) still have an advantage over local competitors,” it
said.
"For example, we note that more than 30 per cent of respondents
explained that the Swiss brand was more important than the
underlying offshore domicile benefits such as client
confidentiality,” the Invesco report continued. It added:
“However, international private banks have seen their competitive
advantage decline. For international private banks, success in
the future may be driven by an understanding of the unique
requirements of GCC family offices and a clear demonstration of
commitment to the region.”