At the 2014 CFA Institute Middle East Investment Conference, Khaled Sifri, CEO, Emirates Investment Bank, provided unique transparency into Gulf Cooperation Council (GCC) high-net-worth individuals. His understanding came from his organization’s recent survey and recently published report on the topic. Emirates Investment Bank conducted its survey throughout the GCC in December 2013 and again in January 2014 to assess the views of high-net-worth individuals and their sentiments about investing and about banking relationships.
Key findings of the report include:
- High-net-worth individuals (HNWIs) have more optimism about the economic and investment prospects of the Gulf region than they do for the globe over the next five years.
- Overwhelmingly, HNWIs are more focused on capital appreciation than on capital preservation.
- Any future wealth accumulation by HNWIs is primarily to be invested in their personally owned businesses and secondarily in investment real estate.
- A slight majority of HNWIs prefer a local bank to have not only personal banking services but also investment banking advisory services to help manage their wealth.
Economic Views, Global vs. Local
Of those HNWIs surveyed by Emirates Investment Bank, two-thirds say the global downturn has affected their investment decisions. More specifically, the downturn has made 38% more cautious, resulting in 25% of them restricting their global investments and 13% solely focusing on investing in the Gulf region. Locally only 43% of survey respondents say local economic conditions have affected their investment decisions. Again, in contrast to the global results, only 21% of HNWIs report being more cautious, and only 18% report limiting the size of their local investments.
The majority of GCC high-net-worth individuals (64%) prefer to keep their assets close to home because they feel their local economy is stable and secure as compared with the global economy. (The behavioral finance expert in me cannot help but see the representativeness bias at play here; familiarity breeds comfort.) Respondents reported having a greater sense of control in local investments. While the investors may be staying close to home as risk mitigation, a whopping 90% are focusing on capital appreciation, as opposed to capital preservation in their investment choices. In particular, GCC HNWIs are focusing attention on the United Arab Emirates, China, and Europe over the next three to five years. Here is a full country breakdown on which countries are catching the attention of the ultra wealthy in the GCC:
- United Arab Emirates: 28%
- China: 21%
- European Union: 21%
- Turkey: 17%
- India: 17%
- United States: 17%
- Saudi Arabia: 14%
- Egypt: 10%
- Australia: 7%
- Oman: 7%
- Kuwait: 7%
- Iran: 7%
- Canada: 7%
(Note: percentages do not add up to 100% because respondents could indicate interest in multiple countries.)
How are HNWIs allocated within their current portfolios, and how would they allocate additional monies? Most HNWIs are not just local investors; on average 34% invested in their own business, and if they had additional capital they would put 27% back into their personal business. Ultra wealthy in the GCC have 25% of their portfolios invested in real estate, and clearly they are excited about property investments, as 37% of additional monies would be spent to secure more.
As an indication of HNWIs enthusiasm about future market returns, 16% of portfolios are invested in cash, but future monies will only be put in cash 8% of the time. Very interesting. Current allocations to private equity and other direct investments stand at 8%, yet 11% would be the allocation once more money comes in through the front door. Gold and other precious metals currently have 6% of assets and would receive 8%.
More traditional financial assets such as stocks and bonds have just 6% and 2% of GCC assets, respectively, and future allocations would be even lower at just 3% and 1%. It’s not clear whether this is a reflection of sentiment about valuations (probably true, certainly for fixed-income markets, where interest rates cannot get much lower) or more of the strong preference for local investments.
Banking Partner Preferences
High-net-worth individuals of the GCC prefer a local bank 59% of the time, with only 36% liking international banks. This preference is due to their belief that local banks are more secure and trustworthy and that these banks have a better understanding of local regulations and markets. Wealthy people also like that local banks provide them with easier access.
HNWIs see wealth management and business banking as two distinct skill sets; thus, 61% prefer to use separate banks for these functions. Reasons provided by respondents include: it allows investors to spread their risks; they can take advantage of more refined offerings, benefits, and services; and they recognize that service levels are different for different bank offerings.
Of the wealthy in the Gulf, 84% find investment banking advisory services are important in choosing a banking partner. Among other differentiating criteria are:
- Level of service: 98% (100% say very or somewhat important)
- Bank reputation and brand: 94% (100%)
- Fees and pricing: 76% (99%)
- Investment expertise and global access: 83% (94%)
- Who the shareholders and board members are: 44% (85%)
- Who the relationship manager is: 44% (82%)
- Friends and family recommendation: 34% (72%)
These results are very interesting and demonstrate one of the themes of CFA Institute conferences: Investors care about the trustworthiness and reputation of their financial professionals more than they care about returns. This view is borne out by multiple surveys, including this one and the CFA Institute & Edelman Investor Trust Study.
The Sixth Annual CFA Institute Middle East Investment Conference will take place in Kuwait on 10 February 2015, bringing together international thought leaders, policymakers, industry experts and key market participants from across the MENA region to consider a central theme: Investing in New Realities.
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