The United Arab Emirates (UAE) is still the main beneficiary of inflows of private capital into the GCC region (Gulf Cooperation Council), according to Invesco’s fifth annual Invesco Middle East Asset Management Study which was launched, analysing the direction and drivers of private capital flow within and outside the GCC.
The report noted that the UAE saw totalprivate capital inflows of 81% on a net respondent view basis in 2014 (figure 4), compared to 52% last year. Over half (58% – figure 1 below) of this capitalwas seen on a net respondent view to becoming from emerging markets, including Russia and Africa. In comparison, the net respondent view shows most other countries in the GCC to be in net outflow (figure 6).
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UAE positioned as an international "safe haven"
In the study’s fifth year, the interviews conducted among over 100 industry participants within the main retail segments, including private banks, retail banks and IFAs, confirmed the growing perception of the UAE as a perceived safe haven for private capital. The 2012 study identified the flow of assets from MENA into the UAEas a result of the Arab Spring, and this year’s study cements this observation as the UAE continues to be a beneficiary of capital flows driven by political instability in other regions.
Crimean crisis driving increase in private capital flow to the UAE
Among the most notable large inflows of private capital into the UAE are those coming from Russia and the surrounding CIS (Commonwealth of Independent States). While there have always been links between Russia and the GCC, this year respondents cited an increase in Russian/CIS assets flowing into the region from 10% in 2013 to 17% in 2014 on a net respondent view (figure 1 – above). This was primarily due to the Crimean Crisis, and when asked about the key drivers of capital flow, 30% of respondents cited local political stability as the most important factor (figure 2 – below).
However, respondents also highlighted the relative risk of a short term reversal of Russian assets if the region stabilises, compared to MENA assets.Whilst the Arab Spring saw expatriate assets and investors moving to the UAE, Russian investors have not relocated and can more easily withdraw their UAE assets at short notice.
Local investment opportunities increasingly driving flows
Whilst geopolitics were identified as a major factor driving capital inflows into the UAE, on the whole, local investment opportunities have now overtakenpolitical stability as the most frequently cited driver of private capital flow. This year, 33% of respondents identifiedlocal investment opportunitiesas the most important factordriving capital(figure 2 – below), compared to 29% in 2013, with the reverse changein the number of respondents citing political stability as the main driver. Qualitative feedback supported the view that the UAE offers more attractive investment opportunitiesin 2014 and that the local regulatory environment (including the DIFC) was improving its reputation.
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By GlobalDataNick Tolchard, Head of Invesco Middle East, commented: "Our study shows that political stability is a hugely important factor in driving the direction of private capital flow, and the UAE is clearly considered a "safe haven" amidst geopolitical upheavals in the region and beyond. But beyond short term trends, there are strong structural reasons for choosing the UAE as a financial centre, partly due to improving reputation of the local regulatory environment such as the DIFC. The fact that many respondents attributed capital inflows to local investment opportunities shows that the UAE is becoming an increasingly attractive investment destination in its own right."
UAE seen as the hub between Africa and Asia
Structural factors being at play when it comes to explaining the increasing inflows of private capital into the UAEis further evidenced by the level of inflows cited as coming from Africa. The study reveals the flows of private capital from Africa are up to 9% in 2014 from 3% in 2013 on a net respondent view (figure 2 – above).
Nick Tolchard explained: "There are historic and growing ties between the GCC and Africa, which ultimately means the UAE is well positioned as a hub for business meetings and private banking between Africa and Asia. We have found that many banks arerapidly building their African divisions and assets under management, and importantly, and in contrast to Russian assets, UAE intermediaries saw African private capital inflows as a longer term more structural trend."
Singapore emerging as a credible alternative to Switzerland
Another trend identified in the study is the small but meaningful shift from Switzerland to Singapore across a range of GCC markets and client segments. In the UAE, 5% of assets leaving the country were allocated to Singapore, compared to 1% last year. At the same time, assets allocated to Switzerland reduced from 10% in 2013 to 4% in 2014 (figure 3 – below).
Many respondents cited regulatory change linked to transparency and disclosure in Switzerland as the main driver around the shift to Singapore. Critically, the study reveals this shift in private capital flow is taking placeat the same time as the number of emerging market retail banksin the UAE is increasing, with new offices opening in Singapore, whilemany Western banks with ties to Europe have withdrawn from the UAE or sold off their wealth management arms.
Nick Tolchard commented: "While this trend is still small, it is telling of changing shifts in international capital flowsand the growing significance of financial centres outside of the Western world more generally – including the importance of the UAE as a hub for financial activity in the emerging markets,in particular."
Overall, the strength of opinion on the UAE and Dubai’s position as a hub for private capital flow was stronger this year, with a net respondent view of 82% in 2014 compared to 52% in 2013 (figure 4).
Increasing private capital flow from GCC countries into the UAE
However, while the UAE is perceived as a net receiver of capital, most of its neighbouring GCC markets are perceived to be in net outflow (figure 6). For most countries this has been a consistent two year trend, but the key change in 2014 is the location of outflows from these markets, with more respondents citing assets going to or via the UAE in 2014, compared to 2013 when we observed relatively limited private capital flow between GCC regions. This is certainly the case for Oman, Kuwait and Bahrain where the percentage of assets flowing to or via the UAE all increased in 2014.
However, a more significant shift for the UAE was the perceived transition of Saudi Arabia into net outflow. In the past, Saudi Arabia has been a large and relatively closed system for private capital with broadly neutral perceptions on private capital flow. However, this year the average has shifted towards a small outflow amid concerns over succession. This is important given the large pool of capital in Saudi Arabia, so even a small contribution to the UAE would have a meaningful impact on UAE inflows.
Nick Tolchard concluded: "Whilst challenges no doubt remain, we are encouraged by the findings in this year’s study, and by the fact that respondents told us that, barring a major event or crisis they are positive on the future of the UAE’s position as a credible internationalfinancial centre."
