MENA investors favour income over risk, says Invesco survey

A fall in risk appetite and the search for income is driving investment behaviour across all retail investor segments in the Gulf Cooperation Council (GCC) region but there are distinct differences in asset allocation, according to third annual Invesco Middle East Asset Management Study.

Expectation of an increased appetite for risk in 2012, as was expected last year, did not materialize, due mainly to the prolonged Arab Spring throughout the MENA region. Instead, investors have lowered their expectations, focusing instead on income.

Year-on-year asset allocation preferences across the GCC region reveal that all investors have been exploiting the short-term investment opportunity offered by different interest rates across the region. This is a key driving force behind all investors, whether Non Resident Indian’s (NRIs), Gulf Co-operation Council locals or non-GCC Arab expatriates. Western expatriates are the exception, for whom low interest rates in developed markets and the need for relative security dictate a conservative approach.

Katie Saha, Associate Director, International Third Party Distribution at Invesco Asset Management, said: “This year the study 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.”

Among GCC locals and Arab expatriates, the preference for local fixed income bonds has increased 58% and 338% yoy respectively since 2011. Typically, these investors have gone for the 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%.

The Arab expatriate segment, most directly affected by the Arab Spring, has seen the most significant change in terms of home-market investment bias. “They have wanted to move their assets out of their home countries because of the instability caused by the Arab Spring,” said Saha. The main beneficiary has been the North American market, with 25% of the allocation.

Their exposure to home markets has reduced from 27% in 2011 to 10% in 2012, while their investment horizons have shortened to 1.9 years. By contrast, GCC investor home market investment bias is still strong, experiencing minimal change at 55%.

Non-Resident Indians (NRIs) have increasingly gone to cash (from 9% to 20%), conducting a carry trade by borrowing from UAE banks at rates of 2-3% and putting their money into deposit accounts in Indian banks yielding about 9% (available, for example, on some HSBC India and ICICI NRI accounts). Their investment time horizons fell back from 5.7 to 3.5 years compared to 2011.

Saha said: “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 expatriates have increased their allocation to global fixed income from 14% in 2011 to 18% in 2012. This reflects the low interest rate environment and trends around searching for income and a need for relative security, the survey says.

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%).

Katie Saha 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.” 

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