Markets

US fund managers expected to accelerate Gulf investment

December 17, 2024, 7:54 AM

Investors remain concerned about corporate governance and transparency despite substantial improvements over the past decade

Research shows US is underinvested
Concern about transparency
Gulf could be fastest growing market

North American fund managers are underinvested in Gulf equities but that may soon change, according to new research.

The region’s low correlation to global and other emerging markets, accelerating economic diversification and improving bourse diversification could make Gulf investments more attractive.

Saudi Arabia (4.41 percent), the UAE (1.28 percent), Qatar (0.86 percent) and Kuwait (0.84 percent) have a combined weighting on the MSCI Emerging Market Index of 7.4 percent.

Passively managed emerging market index funds replicate index weightings almost exactly, but active funds can be under- or over-weight according to managers’ investment strategy. Research by investor relations consultancy InspIR Group shows that North American financial institutions are underinvested in Gulf stocks.

These funds own about $1.25 trillion of emerging market equities via active funds, so would own about $93 billion of GCC equities if they followed the MSCI index weightings. Yet InspIR’s research found that these investors’ GCC stock holdings total only about $52 billion.

The North American funds are underinvested in Gulf stocks for several key reasons, explains Jeff Tewlow, InspIR Connect’s managing director. Investors remain concerned about corporate governance and transparency – a common worry regarding emerging markets – despite substantial improvements over the past decade, Tewlow said.

“When you’re growing really fast, you’re playing catch-up all the time in terms of how to understand investors, the type of information you have to provide,” said Tewlow.

Also, many blue-chip companies have small free-floats and low trading volumes, making funds reluctant to invest due to difficulties in building a sizeable position, he said.

North American fund managers know the Gulf’s financial and energy sectors well but warn stocks in these industries have expensive valuations, Tewlow said.

A ‘classic emerging market story’

Nonetheless, he predicted these same fund managers will increase their investments into Gulf stocks substantially, with consumer goods, infrastructure, transport and healthcare among the sectors of most interest to them, according to his company’s research.

“It’s a classic emerging market story, which is the growth of the middle class,” added Tewlow.

“An investor from one of the largest institutions on earth [told me] there’s no question that over the next five to 10 years, this [the Gulf] will be the fastest growing emerging markets region globally.”

Tewlow’s observations chime with an October report by State Street Global Advisors, the world’s fourth-largest asset manager with $3.5 trillion in assets under management.

“As sectoral diversification and liquidity improve, GCC markets are becoming increasingly attractive for global portfolios, reflecting the region’s ongoing economic reforms and growth potential,” the report said.

“For investors, the underrepresentation of GCC equities in the global indices presents an opportunity. Early movers could potentially benefit from the anticipated rebalancing of global portfolios towards GCC equites over the long term.”

Gulf stocks’ strong performance

Gulf stocks have outperformed emerging markets over a three-, five- and 10-year timeframe, according to the State Street report. This also highlights how – contrary to conventional wisdom – Gulf equities are no longer more closely linked to oil prices than global markets.

“As GCC economies continue to evolve, we expect this trend of reduced oil dependency and sectoral diversification to further enhance the stability and attractiveness of GCC equities,” the report said.

Another key attraction of Gulf markets is their low correlation to global and other emerging markets, State Street notes, due to the region’s limited number and size of tech stocks.

Tech constitutes about 25 percent of both developed market indexes and emerging markets excluding the GCC. That compares with a 1 percent weighting in this region.

The report also highlighted Gulf currencies’ dollar pegs, which removes foreign exchange risk for US investors.

“GCC equities present a unique opportunity for investors seeking growth and diversification, making GCC equities a valuable addition to any well-diversified investment portfolio,” the report said.