GCC markets are opening to foreign capital, encouraging foreign equity ownership: Moody’s
September 07 2020 07:51 PM

* In 2019 Qatar’s cabinet approved a law, which will increase the ceiling on foreign ownership to 100% from the current 49% in most sectors, Moody’s Investor Service noted in a report

GCC markets are opening to foreign capital and encouraging foreign equity ownership Moody’s Investor Service said and noted in 2019 Qatar’s cabinet approved a law, which will increase the ceiling on foreign ownership to 100% from the current 49% in most sectors.

Most GCC countries have made regulatory changes to attract foreign investors since 2014, when falling oil prices made economic diversification more urgent.

As GCC markets open, local asset managers will likely capitalise on their expertise in the region to attract foreign clients, Moody’s said in a report on Monday.

In terms of regulatory standards in the GCC region, Moody’s noted they “vary but are generally improving.”

Financial regulations are at different stages of development in each GCC country. However, they are evolving in such a way as to provide the transparency required to support capital markets and hence the asset management industry.

More rigorous regulation is supportive of asset managers' asset collection and revenue growth, although it creates adjustment challenges for smaller players.

The GCC's population is relatively small compared to Europe or the US, and its asset management sector is highly fragmented. Moreover, each country has a different set of rules, which makes “fund passporting” difficult or impossible.

The sector would benefit from a standardised set of rules across the region, as well as market consolidation. While there has been some market consolidation in recent years, it has been slow to materialise.

Strong performance and growing demand for Shariah-compliant investments are positives. GCC asset managers' performance has generally been strong.

This, combined with growing demand for Shariah investments, has allowed the sector to maintain relatively high fees.

However, Moody’s noted GCC asset managers will have to adapt to a more international client base which will demand a broader product range, and may also scrutinise active fees more closely.

Noting that slow growth and low oil prices are “key challenges” for GCC asset managers, Moody’s said the profitability of asset managers in most Gulf Cooperation Council (GCC) countries will face moderate to high pressure over the next 12-18 months, reflecting the coronavirus crisis and an accompanying drop in oil prices. These factors have weighed on their assets under management (AUM), even if most have outperformed their benchmarks. The sector's relatively low geographic and product diversification and regional geopolitical tensions will add further pressure.

An improving regulatory environment and growing interest from foreign investors will provide some “counterbalancing uplift.”

According to Moody’s asset managers in the GCC countries are “under pressure from a sharp drop in oil prices triggered” by the coronavirus crisis, which has weighed on their AUM.

Current weak oil prices will hold back economic growth and public spending across the region, with negative consequences for asset managers. Oil is also a key source of revenue for the sector's investor base, which consists largely of local high net worth individuals, family offices, and government related institutions, including sovereign wealth funds (SWFs), Moody’s said.

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