The profitability of asset management firms in most GCC countries will face moderate to high pressure over the next 12-18 months, reflecting the impact of the COVID-19 crisis and an accompanying drop in oil prices, Moody’s Investor Service warned on Monday.
‘Asset managers in the GCC countries are under pressure from a sharp drop in oil prices triggered by the coronavirus crisis, which has weighed on their assets under management, even if most have outperformed their benchmarks,’ Moody’s said in its sector report.
The global ratings agency said that the current weak oil prices will hold back economic growth and public spending across the region, with negative consequences for asset managers.
‘Oil is also a key source of revenue for the sector’s investor base, which consists largely of local high net worth individuals, family offices, and government-related institutions, including sovereign wealth funds,’ Moody’s said. However, GCC governments’ plans to privatise some state-owned assets should provide some offsetting stimulus.
Moody’s said the GCC asset management sector’s relatively low geographic and product diversification and regional geopolitical tensions will add further pressure. However, an improving regulatory environment and growing interest from foreign investors will provide some counterbalancing uplift.
‘Geopolitical tension is a risk. 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.’
According to Moody’s, the regulatory standards in the GCC vary but are generally improving. ‘Financial regulations are at different stages of development in each GCC country. However, they are evolving in such a way as to provide the transparency required to support capital markets, and hence the asset management industry. More rigorous regulation is supportive of asset managers’ asset collection and revenue growth, although it creates adjustment challenges for smaller players.’
Moody’s noted in its report that the GCC markets are 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.’
It said the inclusion of Saudi stocks in the MSCI emerging stock market index in May 2019 has encouraged foreign investment in the region. ‘As GCC markets open, local asset managers will likely capitalise on their expertise in the region to attract foreign clients.’
Moody’s said that strong performance and growing demand for Sharia’a-compliant investments are positives. GCC asset managers’ performance has generally been strong, with most Saudi managers outperforming market benchmarks. This, combined with growing demand for Sharia’a 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,’ the ratings agency added.