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Less political risk and improved market liquidity are priorities for investors in the Middle East and North Africa

Qatar: Wednesday, February 20 - 2013 @ 11:21

The survey of 90 institutional investors across 12 countries in the MENA region highlights continuing concerns over political uncertainty, and they are keen to see continuing market liberalisation.

The survey shows a discernible increase in high growth market to high growth market capital flows (East to East). However, fragmented liquidity hampers the potential growth of stock exchanges in the region.

Equally, the findings hint at rapid shifts in market and asset allocation, which up to now have favoured bonds and private equity investments, to growing cross section of investible product, including mutual funds, hedge funds, ETFs, and money market instruments.

In this regard, markets such as Saudi Arabia, Qatar and the United Arab Emirates appear increasingly popular as investment destinations. Clearly a paradigm shift in the mobilisation of capital is underway in the region, influenced by political risk, the rise of localised liquidity pools (but not necessarily residing in national stock exchanges) and a growing adherence to sophisticated collateral and risk management techniques.

This is now the fourth MENA Asset Management Survey, conducted by FTSE Global Markets, in conjunction with the Qatar Financial Centre (QFC) Authority. The survey is undertaken quarterly and measures the outlook of up to a third of the asset managers operating in the region.

At a time of immense market change in the global investment market as new institutions and regulations impinge on national and regional investment regimes, and a global economy still mired in the aftershocks of the 2008/2009 financial crisis, the asset management industry in the MENA region is poised on the brink of a new era. This important survey monitors the increasingly rapid evolution of the asset management industry in the wider MENA region, looking at how macro and regional factors continually exert their effects on the asset allocation, business solutions and business infrastructure. With this overview in mind, the MENA Asset Management Survey has three aims: to describe the investment outlook of a diverse range of asset management firms in the MENA region; to assess the perception of political/economic risk within the region; and to outline current thinking in the asset management industry as to what infrastructure is important to the proper functioning of their businesses. These elements still remain core to the thesis of each quarterly survey. Even so, each has its own character: in part determined by macro-issues; in part determined by the range of respondents.

One of the survey’s most important findings is investors’ assessment of risk in the MENA region. The Q1 2013 survey shows that investor sentiment is increasingly factoring in heightened risk.

Investors responding to the survey were asked whether political risk in the MENA region would improve or worsen over the coming year.

The UAE, Saudi Arabia and Qatar concerned investors least. Syria, Lebanon and Jordan concerned investors most.

Why are these findings important? Several trends particularly influence changes in international investment markets:

• Shifts in capital flows, which are increasingly complex and sensitive to changes in political risk
• Market volatility, which encourages long-term investors to switch between investible assets to achieve stable returns
• Continued interest in cross-border investments to achieve tax efficiencies and higher returns
• The concentration of liquidity in certain markets
• Rising regionalism

In the MENA region context, continuing political unrest in North Africa and the Levant is very likely to further concentrate assets in more stable economies and cause attendant cross-border capital flows.

Yousuf Al Jaida, Chief Strategic Development Officer, QFC Authority, says: “The FTSE Global Markets survey of investor sentiment is a valuable guide to how investors react to economic and political developments in the MENA region. This latest survey shows how investor sentiment towards the region is influenced by global as well as regional trends such as shifts in flows of trade and capital. Positive attitudes towards Qatar substantially reflect the careful evolution of its legal, regulatory and tax environment in the light of regional and global changes and the maturing of its financial sector.”

Andrew Neil, Head of Research and New Media, FTSE Global Markets, says: “Heightened political risks in the MENA region have two effects: the concentration of assets in those countries that are deemed more stable, and a shift in the types of assets employed. It is no surprise then that in the more stable markets in the GCC investors are increasingly looking at equity-based investments and in the riskier markets in the North Africa and Levant bonds seem to be the investment vehicle of choice, particularly the relatively safe haven of sovereign bonds.”

This trend is clear in the following chart. It shows the contrast between GCC and non-GCC investment allocations. The widest variation is between bonds and equities, with equities being favoured in GCC markets.

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Wednesday, February 20- 2013 @ 11:21 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.

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