The Covid crisis, low oil prices and geopolitical tensions are creating pressure on the profitability of the GCC’s asset management industry. 

 

The governments' plans to privatise some state-owned assets should provide some offsetting stimulus, according to top ratings agency Moody’s Investors Service.

 

The profitability of asset managers in most 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, stated Moody’s in its report released today.

 

Weak oil prices will hold back economic growth and public spending, with negative consequences for asset managers. 

 

However, GCC governments' plans to privatise some state-owned assets should provide some offsetting stimulus. A recent increase in tension between the US and Iran may harm investor confidence, delaying large scale infrastructure projects, weakening regional growth, and weighing on the asset management industry, said a senior official.

 

“The sector's relatively low geographic and product diversification and regional geopolitical tensions will add further pressure,” remarked Vanessa Robert, VP-Senior Credit Officer at Moody’s. 

 

“Still,  an improving regulatory environment and growing interest from foreign investors will provide some counterbalancing uplift,” she added.

 

Most GCC countries have made regulatory canges to attract foreign investors since 2014, when falling oil prices made economic diversification more urgent. The inclusion of Saudi stocks in the MSCI emerging stock market index in May 2019 has encouraged foreign investment. 

 

As GCC markets open, local asset managers will likely capitalise on their expertise in the region to attract foreign clients.

 

Key factors including the Covid crisis, low oil prices and geopolitical tensions 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, weak oil prices are a headwind. "The region remains heavily dependent on oil. Weak oil prices as a result of the coronavirus pandemic will therefore hold back economic growth and public spending, with negative consequences for asset managers. However, GCC governments' plans to privatise some state-owned assets should provide some offsetting stimulus.

 

On the geopolitical tension, Moody's said a recent increase in tension between the US and Iran may harm investor confidence, delaying large scale infrastructure projects, and weakening regional growth. This will weigh in turn on the asset management industry.

 

The top ratings agency said GCC markets were opening to foreign capital. 

 

Most GCC countries have made regulatory changes to attract foreign investors since 2014, when falling oil prices made economic diversification more urgent. The inclusion of Saudi stocks in the MSCI emerging stock market index in May 2019 has encouraged foreign investment. 

 

As GCC markets open, local asset managers will likely capitalise on their expertise in the region to attract foreign clients.

 

Moody's pointed out that strong performance and growing demand for shariah-compliant investments were the positives. 

 

GCC asset managers' performance has generally been strong, with most Saudi managers outperforming market benchmarks. This, combined with growing demand for Shariah investments, has allowed the sector to maintain relatively high fees. 

 

However, 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, it added.-TradeArabia News Service