Wealth management in Saudi Arabia has undergone something of a transformation lately, and, judging by recent events, it’s clear the industry is entering into an exciting new phase in its development. Major world events notwithstanding, a formidable financial services sector is fast emerging in the GCC. Having become a world-leading financial centre and major trading hub linking east and west, according to EY in its latest GCC wealth and asset management report, Saudi Arabia – as with its neighbouring nations – is today one of the world’s most favoured investment landscapes of the moment.
“Wealth management is a growing industry in Saudi Arabia”, said Tarek Al Rikhaimi, CEO of Saudi Kuwaiti Finance House (SKFH), “as a number of funds increased by 21.4 percent between 2014/15 as per Capital Market Authority (CMA). With a growing number of listed companies and rising competitiveness in the market, investors have developed an appetite for the professional management of their funds. Total values of investment funds’ assets grew considerably to SR 162.1bn ($43.2bn) at the end of 2014, an increase of 16 percent over the preceding year, and coincident with a 21.4 percent rise in the number of investment funds, to a total of 578.”
As one of the fastest growing investment Islamic banks in the country, SKFH is leading many of the latest developments in Islamic wealth management and welcoming international investors into the market. Now, coming up to a year since the Saudi Arabian Capital Markets Authority opened its equity markets up to international investment, the investment house’s expertise and influence is more important than ever.
“Foreign investors were formerly not allowed to have direct access to Saudi Market”, said Al Rikhaimi. “Though access could be gained through Funds, Swaps and ETFs, an announcement by CMA to allow the Qualified Foreign Investors (QFI) to have direct access to the market has given a new opportunity to the QFI to tap the biggest GCC market. This could either be for higher returns or just for diversification purposes.” Open to banks, brokerages, securities firms, fund managers and insurance companies, the decision to open capital markets to foreign participation has attracted investors from across the globe, and promises to strengthen the market further still.
“This will not only increase the liquidity in the long term, but also the way in which the companies are being valued. The market is somewhere between weak to a semi strong form efficient right now. We expect it to move towards semi-strong form efficient as the number of institutional participants in the market increases and the volatility, as a result, decreases.” With a market capitalisation of around $550bn (see Fig. 1), Saudi Arabia has locked horns with Mexico for the number seven spot among emerging markets, ahead of South Africa and Russia.
However, it’s important the enthusiasm doesn’t detract in any way from the all-important issue of regulation. True, the reaction to the opening was akin to a ‘soft bang’ of sorts, that’s according to Institutional Investor, yet the news for wealth management in Saudi Arabia is overwhelmingly positive.
“The Capital Market Authority has been controlling the market using different laws and regulation to protect investors. These regulations are being constantly improved to follow the international best practices and standards of conduct.
Apart from market optimism, this is one of the reasons that more and more companies as opting to go for an IPO”, noted Al Rikhaimi. “Further, recent opening of market to Qualified Foreign Investors is definitely going to increase the liquidity in the market, which is good for listed companies. However, the capital inflow is not at the pace expected due to an oil glut, and the effect of China’s hard landing on global capital markets. We consider it a major step by Saudi Capital market towards joining the emerging markets pool.”
Speaking on the ways in which SKFH has benefitted as a result of the sectors’ – though more importantly the country’s’ – transformation, Al Rikhaimi said that increased regulation has boosted investor confidence in the market, as well as the demand for professional managers. “This, combined with an ideal environment for IPO and our ability to timely understand the market trend and launch the right products, has indeed benefited us in term of an increase in AUM”, he commented.
The investment house SKFH Batik IPO fund, for example, has been something of a star performer. Launched in mid-2014, the fund comprises a total of 26 IPO funds, with 88 percent of them launched after SKFH came into being, and more than 70 percent launched just in 2015. “We have set the trend in the market with our initiative and performance”, said Al Rikhaimi of the fund.
“We expect the trend to continue in 2016 and there are number of IPOs expected in 2016. Since IPOs are usually under-priced here and there is a restriction on foreign investors to invest directly in IPOs, we believe that investors would tap that opportunity by investing in IPO Funds.” SKFH has been so successful on this front simply by focusing on the timing of the market. “We engage in fundamental and technical analysis with a focus on macroeconomics to analyse the trend and direction of the market in the long-term.”
SKFH has realised achievements above and beyond those of its competitors, again by employing an analytical investment strategy and by making the most of its workforce. Al Rikhaimi explains how SKFH’s team has a rich and diversified background, with expertise ranging from investment product development, debt and equity capital markets, to real estate and private equity investments. “Our investment strategy varies with respect to the objectives and the terms and conditions for each individual fund”, he added. “Multiple approaches are employed in order achieve those objectives.” To take one example, SKFH takes top down and bottom up approaches to equity valuation, as well as active to semi active approaches to portfolio management, depending on the market conditions, given that the market in Saudi Arabia is more volatile than in mature markets.
“Most importantly, our approach is focused. Instead of representing ourselves as a one stop shop for investors, we work hard on timing the market, to launch the appropriate products and completely focus on managing them. We attribute this focused approach to our success in ‘SKFH Batik IPO Fund’.”
Positive returns in the market depend not just on the right strategy at the right time, however, and a great deal should be said about the advantages of a healthy economy. Healthcare and education has been the focus of the Saudi government lately, according to Al Rikhaimi, and it has consistently maintained the highest budget allocation for these two sectors, which brings benefits for the country, certainly in terms of human capital.
Last year, allocation for the education sector stood at around 25 percent, while the percentage stands at a lesser – albeit still impressive – 18.6 percent for the healthcare and social sector. Despite the decline in oil markets and the fact that approximately 80 percent of the revenue for the country derives from oil, the government has vowed not to cut spending in these two sectors, in light of the benefits they bring to the country’s ongoing development.
“There has been an increase in the stock exchange listing of healthcare companies, however, the education sector still lags behind the trend as it is in its initial growth phase, and hence, an ideal scenario for private equity and venture capital market”, said Al Rikhaimi. In fact, there is only one education stock listed in the market and SKFH expects the number to increase over the next five to 10 years. “For the healthcare sector, we believe there will be quite a few private equity exits through IPO”, Al Rikhaimi went on to say. “This is also an excellent opportunity for unit holders in our IPO fund, as the outlook for the sector is excellent with the fact the shares are usually offered at below their intrinsic value in this market.”
Inasmuch as the market is still relatively new to international investors, there are plenty more hurdles for the wealth management industry to clear. “Though the recent decline in oil prices worried the investors, we are very optimistic as the market has been resilient to short term jitters and emotions”, noted Al Rikhaimi.
“As mentioned earlier, the Saudi market has recently been opened to Qualified Foreign Investors who have now been granted direct access to the local market. Capital inflow is low due to low oil prices as foreign investors typically prefer the petrochemical sector, and a huge inflow is not expected unless oil recovers.
“We believe that strong company fundamentals, government spending and an increase in the number of companies looking for an IPO will continue to support the market. We have multiple projects in the pipeline, including real estate and sector specific funds”, concluded Al Rikhaimi, which again bodes well for the future of SKFH and that of Saudi Arabia as a whole.