A fall in risk appetite and the search for income is driving investment behavior across all retail investor segments in the Gulf Cooperation Council (GCC) region but there are distinct differences in asset allocation, according to the third annual Invesco Middle East Asset Management Study.
2012 has not been the inflexion point where appetite for risk increased, as was expected in 2011 due to the prolonged Arab Spring. Invesco’s report, the only in-depth study of its kind, shows that declining target returns have prevailed in 2012 due to the continued unrest in the wider MENA region and on-going market volatility. However, it is the different behaviours of the varied retail investor segments that form the most interesting theme from the report, most notably the investors’ search for income and the resulting asset allocation.
Year-on-year asset allocation preferences across the GCC region reveal that the short term investment opportunity offered by interest rate differentials is a key driving force behind Non Resident Indian’s (NRIs), GCC locals and Arab expatriate investment behaviour, while low interest rates in developed markets and the need for relative security and a conservative approach are behind Western Expats’ preferences. The results reveal very different investment asset allocation choices as presented in the table below :
Nick Tolchard, Head of Invesco Middle East commented: “Our study provides a unique insight into the evolving Middle East asset management industry. This year it shows us that retail investors are aligned in their search for income, however each segment favours different asset classes based on their individual appetite for risk and returns. This is vital intelligence when it comes to understanding the types of products that should be made available to these groups.”
GCC locals and Arab Expats
The preference for local fixed income bonds among GCC local and Arab expatriate segments has increased since 2011 (a year-on-year increase of 58% and 338% respectively), driven by significant interest rate differentials and the relatively attractive income offered by local sovereign or quasi government debt bond yields linked to the fixed rates they offer. Current bond yields in the UAE and Qatar of over 5% in some cases are perceived as attractive on a risk-return basis compared to international US-dominated yields of less than 1% (see Figure 2).
The Arab expat segment has seen the most significant change in terms of home-market investment bias, which has reduced from 27% in 2011 to 10% in 2012. Arab expats also have the shortest investment time horizons at 1.9 years, both of which are likely to be a reflection of the continued instability and unrest in the MENA region, along with the general outflow of both people and capital. GCC investor home market investment bias is still strong, experiencing minimal change sitting at 55%.
Non Resident Indians (NRIs)
Interest rate differentials are also the driving force behind Non Resident Indian investment behaviour in the GCC region as a result of NRI-based deposit accounts yielding 9%, compared to UAE deposit rates of 2-3%. The study found allocations to offshore savings plans sold in the local GCC markets decreased from 56% in 2011 to 42% in 2012, while year-on-year allocations to cash increased from 9% to 20% (see Figure 4). The 6% increase in home-market investment bias on last year is a likely reflection of this activity (31% in 2011 and 37% in 2012).
Meanwhile, investment time horizons for NRIs have decreased from 5.7 to 3.5 years compared to 2011, which is to be expected given they look to more liquid investments such as cash. This segment has the strongest target returns (9.6%), a likely reflection of their expectations when investing back into their home emerging market.
Nick Tolchard commented: “Non-resident Indians view cash as having an attractive relative yield as well as being a more risk free asset, thus leading them to allocate more to Indian based deposits. However, there is growing concern about currency risk. The Indian rupee has continued to depreciate year to date versus the dollar so this is expected to have a negative impact on NRI dollar based savings, therefore you have a double edged sword, winning on the yield front but losing on the currency. I do believe we need to see markets stabilise before we see a strong allocation to funds again.”
Western expats
An increase in allocation to global fixed income from 14% in 2011 to 18% in 2012 is evident within the Western expat segment; a general reflection of the low interest rate environment and trends around searching for income and a need for relative security.
A strong year-on-year demand for international life wrappers also continues to prevail, accounting for 62% of Western expat portfolios with single premium products forming the largest share (37%). Demand for structured notes has also seen a rise from 7% last year to 11% this year. Western expats are the only segment to see an increase in time horizons from 6.7 years to 7.5 years, while home market investment bias has remained very similar to 2011 (22%).
Nick Tolchard concluded: “This trend appears directly linked to the volatile global economy and the subsequent reduction in risk appetite. The conservative approach we are currently seeing from this group certainly correlates with the allocation towards lower risk products. Our research therefore suggests than any new product propositions being put forward could benefit from offering exposure to quality sources of income and relative security”
