Debt markets in MENA are largely underdeveloped and widely characterised by lack of trading in secondary markets, says Kuwait Financial Centre (Markaz) in a report.
Market liquidity, which averaged USD 140 billion between 2005-2008, slumped to an average value of USD 32 billion between 2009-2012.
The relative halting of lending played a large part in declining liquidity, because earlier to the global financial crisis, credit was funnelled to purchase securities. The average annual growth in loans during 2004-2008 was 29%, reaching a high of 38% in 2007, fell subsequently to single digits. Also, the retail investors who constitute the bulk of market participants are undergoing their own state of deleveraging post the global financial crisis.
A Markaz report shows that the MENA asset management industry, which currently manages approximately USD 62 billion in assets in about 782 funds, has been in the doldrums post the global financial crisis with Assets under Management (AuM) steadily declining. AuM/GDP ratio for half of the MENA countries was less than 0.5%, implying lack of mutual fund penetration as an investment option.
The MENA asset management market is concentrated among the top asset management companies, with the top 10 asset managers, out of a total of 174 managers, managing more than half of the total assets.
Lack of avenues to participate in the economic growth story, political risk and the resultant volatility has made the task of raising funds a challenge. Broad basing the equity market, enhancing the participation of institutional investors and opening up ownership to foreign participants would help tide over the problem and improve industry AuMs.
According to the report, the “carnage of global financial crisis is still felt with weak economic growth in most developed economies and uncertain outlook. Investors who got badly bruised did not just lose their capital but also the trust which they had in their advisers.”
While the global AuMs have been stagnant for the past four years, AuMs in the MENA region has witnessed a steady decline over the years. Sovereign wealth funds are massive and too large for MENA. Investing locally would not help their cause in achieving diversification.
Ultra high net worth individuals are a niche group who are predominantly served by private bankers. The retail clients are a polarised group. They either trade aggressively or shun markets altogether and invest in bank deposits.
The UAE and Qatar were recently upgraded from Frontier Market to Emerging Market in the MSCI Emerging Market Index, which fuelled discussions about the viability and possible time frame for Kuwait and Saudi Arabia to be included in the same way.
Foreign Direct Investments (FDIs), which have been the game changer for many markets, can bring with them a host of changes and greatly institutionalise the market. However, foreign investments in GCC stock markets have remained on the sidelines so far and much needs to be done to attract them.
Disclosing timely and comprehensive information in English would be a good start. Expediting corporate governance measures, strict enforcement and adherence to accounting standards, standardised corporate announcements and guidance from management would help better understand the business and would result in efficient markets, benefitting all in the long run.
Innovative measures such as unifying stock exchanges could help in increasing market liquidity, limiting volatility, enhancing confidence for market participants and consequently can provide an attractive destination for international institutional investors.
@Gulf Times