Dubai : Since moving to the UAE more than a decade ago, Nadeem Haji has put up a decent nest egg which is stashed away in a bank and has built his dream house.
The 38-year-old Pakistani expatriate, who works as an AutoCAD draughtsman, has no life insurance, pension fund or stock investment and neither does he intend to switch his hard-earned money into any savings instrument. His cash in the bank is not even earning interest.
"My money stays in the bank for now. I won't even lock it away to earn interest. The rates are very minimal, anyway," he said.
So, how will he ensure he has enough money when he retires? A firm believer in hard work, Haji said he will just continue to save and work hard, then retire early.
"I will use whatever I have saved and start a business. I don't believe in any investment scheme like life insurance. They're complex and tricky," Haji said.
Haji is just one of the many residents in the region who prefer to keep their life's earnings in bank accounts rather than venture into non-traditional investment options. For them, "cash is still king" and the further away they are from risk, the more secure their financial future will be.
The GCC has one of the world's largest pools of capital, with collective private wealth estimated to be at $1.5 trillion (Dh5.5 trillion) as of 2008 according to International Monetary Fund data.
However, the savings culture of individuals in this part of the world is still different from those in the West, where retail investors are far more accustomed to the norm of a diversified portfolio.
According to Saudi Arabia investment bank NCB Capital, retail investors in the GCC have mostly placed their money in bank deposits and equities. Bank deposits stand at $600 billion and equities at $700 billion.
Bank deposits in the region have been constantly rising since the onset of the global financial crisis
In the UAE alone, total deposits with banks rose from Dh769.5 billion in the first quarter of 2008 to over Dh977 billion at the end of third quarter last year.
Individual preferences
This trend is likely to have been further amplified when individual preferences shifted toward bank deposits following losses during the economic turmoil.
Equity investments also soared during the pre-crisis years. While market turnover fell during the subsequent correction and liquidity squeeze, trading volumes in the GCC bourses still hit 323 billion in shares at the end of 2009, from 292 billion and 275 billion in the preceding years.
Retail investor participation has also ranged between 70 and 90 per cent in the regional equity market in the last few years.
Gold has been an important consideration for GCC residents, but most consumers spend their money on finished jewellery.
Gold consumption in the region stood at $7.4 billion in 2008, of which gold jewellery accounted for 90 per cent.
Investing in real estate has also become popular, but the sector recently went through a significant correction. Access to real estate has been limited by price, low liquidity and the lack of mortgage finance.
Collective saving schemes that are popular in mature and sophisticated markets such as life insurance, mutual funds and pension funds are still minimal. Even occupational and voluntary pension schemes are largely non-existent.
As far as insurance is concerned, overall penetration averages a mere 1 per cent of gross domestic product, compared to 5 to 15 per cent in the developed economies as of 2009.
In Saudi Arabia, insurance penetration accounts for .6 per cent of GDP, and most of it is non-life, driven by mandatory health and motor insurance.
Writing in NCB Capital's GCC Economic Monthly Bulletin, Dr Jarmo Kotilaine, chief economist, notes the lack of diversity has exposed the retail investors to significant volatility. Cash deposits, for one, remain vulnerable to inflation.
He acknowledges that the limited range of investment products in the region, low awareness among savers and inaccessibility of financial advice are just some of the factors shaping the savings profile of GCC residents.
Limited diversity
"There's limited diversity. There isn't any culture of investment advice. You walk into a bank and typically, you will be given a brochure of a couple of basic products. There's nothing by way of assessing savings objectives that suit your needs or how to build your nest egg or diversify your portfolio.
"Besides, a majority of the population don't have a savings culture. There is no concept, in many cases, of a long-term savings horizon. The fiscal environment in the region is different," he told Gulf News in a phone interview.
The narrow range of financial products in the region, however, reflects the young age of many asset classes and uneven development of parts of the fin-ancial sector.
Kotilaine points out that the equity markets in the region started taking off only in the late 90s and there is still, by international standards, "extreme underdevelopment" of collective savings vehicles. Also, structural investment opportunities can still be difficult for investors to tap.
Given the limited options, investors' default response is to resort to cash deposits when markets are gripped by a sharp correction and widespread panic.
"The only alternative they have at the moment is cash. By keeping their money in cash deposits, people think they're protecting their wealth. In sophisticated markets, you would have bonds and other ways to tap," he adds.
Shailesh Dash, CEO of Al Masah Capital, said the disparity in the regional savings profile also has to do with investment managers guiding investors to the same assets over and over again.
"This is a function of a sales-driven environment based around a narrow product offering. This also explains why real estate became a significant part of the investment portfolio a few years ago and how it is quickly disappearing again," Dash told Gulf News.
However, the biggest issue with the GCC region is the slow development of the local asset management industry.
Dash said the savings profile will change once a sophisticated asset management industry that has the ability to provide a variety of products will be in place.
Some financial experts said providing incentives might encourage residents in the region to try other products outside bank deposits and equities. However, Dash said it is less a question of incentive and more of a question of education.
"The ultimate incentive should be the steady growth of savings and wealth with managed risk and a portfolio composition that reflects the profile of the investor. Showing real-life examples of how diversification provides steady portfolio growth with little volatility should make the investor more comfortable.
"When more options are available locally, with an able infrastructure and strong institutional support, the more probability of investors creating diversified savings plans," he added.
Spreading those dirhams around is a wise investment strategy
As they say, putting all your eggs in one basket is not advisable, so if all your life's savings are still lying idly in the bank, it's time to look for other investment options and spread those dirhams around.
Shailesh Dash of Al Masah Capital warns that a portfolio composed of only two asset classes has inherent risk because of its skewed exposure.
Even minor market movements can have a profound impact.
Ideally, a good portfolio mix should include bonds, sukuk, real estate investment trust and funds, as well as commodities.
"These should give you more robustness and productivity," said Dr Jarmo Kotilaine, chief economist at NCB Capital.
If you're a female investor, you may consider keeping 10 per cent of your cash in the bank and put 20 per cent in cautious investments, 50 per cent in balanced investments and the rest in higher risk schemes, according to Ishrat Kiyani, head of premier banking and wealth management, UAE, HSBC.
Kiyani recommends the Global Equity Fund and North America Fund for balanced investments and for higher risk schemes, he recommends emerging market equity funds.
"There should be assets held in property or property funds and bonds, and maybe hedge funds as well as commodities," Steve Gregory, a financial adviser at Holborn Assets, added.
A portfolio mix, however, depends on the investor's age and attitude to risk.
"Traditional safe investments have often been disastrous in recent years. Asset allocation is important, but so is identifying market opportunity.
General rule
"It's no good buying bonds paying three per cent if interest rates are likely to rise to combat inflation, for instance.
"Quantitative easing from the US is going to boost stock markets and gold also. Some people want to take advantage of currency changes. These are my beliefs, but clients will take more, or less, risk if market falls depending on their own attitudes and quests for higher returns," explains Gregory.
Since investing is all about taking risks, keep in mind the general rule: the bigger the potential return, the bigger the risk.
"As with any investment in the stock market, there is a chance that it could fall as well as rise, therefore, never invest money that you can't afford to lose," notes Kiyani.
Consider any investment with a long-term horizon, preferably of five years or more, and don't just follow blindly. Do your research before investing in a particular asset class, no matter how popular it is. Remember, herd mentality can lead to a bubble, such as the one caused by the Dotcom in the early 2000s or the most recent one in Dubai's real estate market.
If you invest in capital markets, don't be tempted to pull all of your money when things go bad. "
Those who do this often find they have taken their money out at the bottom of the market, only to see it rebound soon after. We would say it's generally not a case of timing the market, but time in the market that counts," says Kiyani.
If a particular asset class is performing well at the moment, there's no absolute guarantee it will stay that way. So, to even out volatility, "drip feed" your money into the market.
"It is virtually impossible to predict with 100 per cent accuracy which asset class will perform best in a given year. Therefore, it makes sense to be diversified across a range of assets with low correlation over the longer term," said Kiyani.
New products to widen portfolio
Although the savings culture in the GCC is still highly skewed by international standards, new investment products have recently been cropping up, providing the region's consumers an option to widen their portfolio.
With the rise of Shariah-compliant finance, several types of products, mostly sukuk, have been launched in the region. A report by NCB Capital notes that various Sharia-compliant products have already attracted a growing number of consumers to financial services.
"These products not only address cultural sensitivities, but also offer an attractive combination of relative capital protection and predictable returns to investors," the report said.
New asset classes
The Abu Dhabi Securities Exchange in the UAE is also launching exchange traded funds (ETFs), while the Capital Market Authority in Saudi Arabia has just decided to authorise the kingdom's first ETF. Saudi's move is seen to spur a wide range of new, cost-effective asset classes and products that average retail investors can also tap into.
Also, the Central Bank of Bahrain has introduced the country's first real estate investment trusts (REITs). Islamic REITs are expected to gain traction, giving the rising popularity of Sharia-compliant products. Gary Dugan, acting general manager and chief investment officer, private banking, at Emirates NBD, also noted that some investors are shifting their cash to other savings vehicles.
"More recently, we have started to see investors invest in bonds and sukuk and more broadly in equity markets. Recent bond and sukuk issues have encouraged investors to switch cash into these asset classes," he said.
"The excitement in the emerging markets also encouraged some investors to invest more broadly into these equity markets. China and India have been the standouts for new investment," Dugan added as he confirms that investors still keep a considerable amount of their wealth in cash.
"We have seen an acceleration of cash building through the summer months. [But] more recently, with cash yields falling, we have seen more willingness on the part of investors to look at investing in bonds and sukuk in order to improve their return potential."
