As 2018 starts, investors are preparing for an uncertain year. While the global economy is growing at its fastest pace since 2008, new risks have come to the forefront of investors’ minds, such as growing political and economic challenges, and an increasingly complex global business climate.
The Middle East is no exception, as longstanding regional conflicts, diplomatic crises and an ongoing economic slowdown are creating additional challenges for the region's institutional investors.
To help investors navigate this business environment during this year, we identify four global trends that will impact the region, and outline some tips for investors looking to stay ahead in uncertain times.
In response to strong global growth, many of the world's major banks are starting to pull back on expansionary monetary policies. The US Federal Reserve recently announced a plan to gradually normalise its balance sheet over the coming years (referred to as quantitative tightening or "QT").
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Mercer seeks to double assets under management in the Middle East
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The Bank of England implemented its first rate hike since 2007 in November last year. The European Central Bank has announced a reduction in the rate of asset purchases from this January. The pace and scale of the shift from monetary easing to tightening will be a major influence over economies and markets – both in the region and globally – through 2018 and beyond.
This is likely to have a direct impact on the Middle East, as the region’s central banks have historically followed the actions of the US Federal Reserve, making future interest rate increases a possibility for the region.
The later stages of a credit cycle typically present a challenging environment for investors, offering lower returns and greater risks than the early or mid-cycle periods.
While we anticipate the current economic strength will continue into 2018, investors should start considering the ways in which they might prepare portfolios for the risks and opportunities that the late stage of this credit cycle could present.
As many GCC nations’ currencies are pegged to the US dollar, and many of the regions’ governments and financial institutions mirror the credit policies set by the US, an increase in the cost in borrowing in the region is likely.
Since the financial crisis of 2008, politics has become increasingly polarised, manifesting in the Brexit vote, elections across Europe, the election of Donald Trump and more recently in the Catalan bid for independence. In the region, this political fragmentation has been seen with the GCC-Qatar diplomatic standoff, an increasingly assertive Saudi Arabia, and growing tensions between the GCC and Iran. Investors are likely to face an environment of heightened political uncertainty for some time and should consider stress testing portfolios when reviewing their strategy in 2018.
The financial crisis of 2008 chipped away at trust levels and as such, institutional investors increasingly need to recognize the importance of their role in acting as good stewards of the capital entrusted to them. Investors need to have a transparent set of beliefs in relation to environmental, social and corporate governance (ESG) issues as well as recognising and managing systemic risks such as climate change. It is anticipated that a growing percentage of investors will seek to reflect their values and to promote social good when investing their assets.
This global ESG trend aligns with many government initiatives in the region to promote sustainability, such as the UAE Sustainable Development Goals, Dubai Smart City Initiative, ECO Mena Initiative and many others, which place sustainability at the heart of the region’s modernisation and diversification efforts.
Navigating these four trends will be essential for investors to capture returns in 2018, as an increasingly complex investment climate requires increasingly sophisticated investment solutions.
John Benfield is a partner and the regional head of investments for Mercer Wealth, the world’s largest investment consultancy, with regional offices in Dubai and Riyadh
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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- Americans living abroad file taxes with the Internal Revenue Service, which can cost hundreds of dollars to complete even though about 60 per cent do not owe taxes, according to the Taxpayer Advocate Service
- Those obligations apply to millions of Americans residing overseas – estimates range from 3.9 million to 5.5 million – including so-called "accidental Americans" who are unaware they hold dual citizenship
- The double taxation policy has been a contentious issue for decades, with many overseas Americans feeling that it punishes them for pursuing opportunities abroad
- Unlike most countries, the US follows a citizenship-based taxation system, meaning that Americans must file taxes annually, even if they do not earn any income in the US.
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