The opening of the Saudi Stock Exchange to foreign institutional investors in June has contributed significantly to the direction of private capital flows in the GCC region, according to Invesco’s sixth annual Middle East Asset Management Study.
Last year’s study found that the UAE, with its perceived “safe haven” status, was the main beneficiary of inflows of private capital into the GCC region.
However while the UAE remains popular, with 73 percent of respondents saying that investable assets and people are in net inflow into the UAE (compared to 89 percent last year), this year’s study revealed a turnaround in the net respondent view scores on the direction of capital flow to Saudi Arabia, from -17 percent last year to +61 percent this year.
This is a significant finding in the context of low global oil prices and declining government surpluses in Saudi Arabia, said Invesco.
Its market study – based on 167 interviews with sovereign wealth funds, state pension funds, local insurance companies, family offices, banks and IFAs across the region – also showed that Bahrain has also seen a notable turnaround in sentiment on capital flows, moving from a 73 percent net negative view score last year to a positive score of 27 percent for 2015.
“There is a causal link here to Saudi Arabia as a key regional partner and although the stabilisation of Bahrain’s local political environment was a contributing factor to this sentiment, participants recognised that Bahrain is no longer a major financial centre and its fortunes are dependent on its neighbours,” said the report.
It added that the primary driver of inflows in Saudi Arabia was positive perceptions of the economy and the opening of Saudi capital markets.
The opening of the Tadawul, Saudi Arabia’s stock market, to international investors in June, was eagerly anticipated by participants and seen by many as a first step towards market liberalisation and future reforms.
Many expect this change to be a key driver of medium term capital inflows, even if it would only have a relatively small impact on capital flow in the short term.
Stock market performance and opportunities to participate in IPOs were named as the second most important drivers behind positive perceptions of capital inflows in Saudi Arabia.
Nick Tolchard, head of Invesco Middle East, said: “Our conversations in the region show that whilst there has been optimism surrounding the regional economy and capital markets, concerns such as the oil price and government finances persist.
“Whilst things can change quickly in the Middle East, it will be interesting to see if positive sentiment amongst local, especially Saudi, investors translates into reality over the next 12 months and whether the anticipated effects of the opening of capital markets take hold.”
An example of a rapid year-on-year reversal in sources of capital inflows is the decline in private capital coming into the UAE from emerging markets, including Russia.
Last year’s study showed inflows from emerging markets at 58 percent, dropping down to 41 percent this year. Flows from Russia in particular are thought to have been affected by the decline in the rouble reducing the buying power of affluent Russians in the UAE real estate and tourism sectors.
Tolchard added: “This decline in Russian capital inflows, may be cyclical given the strong and ongoing ties between Russia and the GCC. Furthermore, in 2015 greater capital inflows from MENA and other GCC markets have offset declines from emerging markets.
“These findings underline the diversified nature of the UAE economy, especially with capital flowing increasingly from MENA and the GCC. This could be transformational for the UAE given the longer term profile of GCC capital inflows and is a much more stable and sustainable source of capital than relying on negative events in international markets causing short-term capital flight.” Arabian Business