GCC economies: A compelling opportunity for asset managers

The Gulf represents one of the most exciting opportunities for asset management anywhere in the world. At a time when global markets are being rocked by credit problems and an uncertain economic outlook, the Gulf Cooperation Council (GCC) presents a compelling range of drivers: growing wealth, at a sovereign and individual level, fuelled by a record oil price; growing sophistication in investment; liberalizing regulatory environments across the region; and stock markets that show little correlation to global equities.

At the heart of the Gulf’s appeal is its strengthening economic position, and it sets a framework for the growth of a vibrant asset management industry. National income growth averaged 19% in the six GCC nations (Saudi Arabia, Kuwait, Qatar, the United Arab Emirates, Bahrain and Oman) in the four years to June 2007; over the same period, GCC governments added $500 billion to their net foreign assets despite huge spending on projects. In the Middle East generally, GDP doubled between 2002 and 2007, and is projected by Morgan Stanley to reach $1.045 trillion in 2008, representing a compound annual growth rate of 16%; and within that, the GCC is not only by far the biggest chunk (Saudi Arabia is 37% of regional GDP) but is growing in influence – Qatar, Kuwait and the UAE raised their share of regional GDP collectively from 27.5% in 2002 to 35.4% in 2007, according to Morgan Stanley.

Additionally, the Gulf is one of those rare parts of the world where the age dependency ratio is declining: it’s a young region, with its population entering a demographic sweet spot, and more and more people of a working age.

In large part, it’s all about oil. The Middle East provides 62% of global oil reserves and 31% of global production, according to Deutsche Bank; the GCC alone was already generating a current account surplus of over 30% of GDP in 2007, and that’s before oil topped US$100 per barrel. According to the National Bank of Kuwait, GCC hydrocarbon export revenues climbed 47% in 2005 and another 20% in 2006, reaching $360 billion in the last of those years, and that, again, is based on a far lower oil price than today. A cross section of analysts and the IIF suggests that the break-even prices for oil producing countries are between $25 and $42 per barrel in the various GCC countries – and ‘break-even’ simply means the revenue required to balance the budget. Analysts say that government spending is generally based on the assumption of $50 a barrel. "At $51, you’re putting another dollar into the sovereign wealth fund for every barrel of oil," says Daniel Smaller, managing director for sales and distribution at Algebra Capita, an independent fund manager in Dubai. "So at $110..."

According to data from the IMF and HSBC, every $1 increase in the oil price, sustained for one month, means an additional $500 million of revenues for GCC producers. If one considers the difference between oil at $60 a barrel, and at $80 per barrel, it equates to a GCC economy $200 billion bigger, or 25%; a fiscal surplus $100 billion bigger, or 90%; and a current account surplus $100 billion bigger, or 70%. "If oil dropped to $50, the economy would continue to grow at a very healthy rate," says Tarek Sakka, CEO of Ajeej Capital, a recently formed independent fund manager in Riyadh, referring to Saudi Arabia; at double that level, the wealth effect is immense.

Consequently, governments have been able to pledge huge amounts for capital expenditure in the region – commonly cited figures, if somewhat vaguely sourced, are $500 million in the next two years, and $2 trillion in the next 10. And it’s not just oil that is providing such a boost. Non-oil GDP is rising too. To take Kuwait as an example, NBK says that financial services, transport and storage, communications, construction and manufacturing have all achieved double-digit growth for three years in a row. And in Saudi Arabia, Brad Bourland, chief economist at Jadwa Investments, forecasts the non-oil segment of the Saudi economy to grow at between 7 and 8% through 2010. "The boom continues to build and spread to the private sector," he says. "From what it originated as – an oil price-driven boom, which means government revenues and mega projects – it is now spreading to more non-oil, with private sector enthusiasm across the board. The outlook’s very bright."

All told, the IMF’s World Economic Outlook predicts 5.9% growth for the Middle East in 2009, and in some nations, notably Qatar and the UAE, analysts sometimes print double-digit expectations for near-term GDP growth. Perhaps best of all, the Gulf is not at all reliant on the US consumer, hence its decorrelation with world markets. "Look at the number of bullish reasons to invest in the Middle East," says Smaller. "There’s high growth. In an inflationary environment you want to be in markets with a large attraction to fixed assets, infrastructure, oil and real estate – so the Middle East. There’s an undervalued currency; negative real interest rates, pushing people to invest rather than leave their money in the bank; market multiples below those of other emerging markets but with higher growth; index changes happening; and the fact that it’s not tied to the US consumer. The list goes on."

Mutual fund AUM in the region 2007 estimates

Source: Saudi Arabian Monetary Agency, Central Bank of Kuwait, Central Bank of Bahrain, Cerulli Associates