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Continued bullish trend on the Saudi Stock Exchange (Tadawul), and a domestic focus of affluent investors is boosting the fortunes of Saudi asset managers.. Image Credit: Reuters

Dubai: Saudi Arabia’s asset management industry that witnessed a decline in total assets under management (AUM) due to COVID related uncertainty and decline in oil prices in early 2020 has made a steady recovery, according to KPMG.

The decline in oil revenues translated to reduced inflows to AUMs until oil prices recovered from the lows of March 2020. This was clearly visible in the industry’s AUM data which as of first quarter of 2020 had dropped to SAR481 billion from SAR500 billion at year end 2019 but then recovered to SAR515 billion as of the second quarter 2020.

“Fortunately for fund managers in Saudi Arabia, the brief decline in AUMs was manageable. Funds tended to be sticky and the affluent and ultra-high net worth individuals (UHNWI) client base continued to have a higher risk appetite to withstand market volatilities,” KPMG said in a report.

Strong market recovery

For the year as a whole, the asset management industry in Saudi Arabia reported favorable results in 2020 amid continued bullish trend on the Saudi Stock Exchange (Tadawul), and a domestic focus of affluent investors.

The inclusion of Saudi Arabian equities in global indices such as MSCI and FTSE in mid-2019, coupled with the mega Saudi Aramco IPO listing on Tadawul in the fourth quarter of 2019, profoundly impacted global and local investor sentiments.

The Tadawul market capitalisation increased by 385 per cent in 2019, reaching SAR9,025 billion by the end of 2019. This market capitalisation was further accentuated in 2020 by main market IPOs such as Dr. Sulaiman Al Habib Medical Services Group, Amlak International for Real Estate Finance Company and Bin Dawood Holding Co, which resulted in market cap reaching SAR 9,101 billion by 31 December 2020.

The foreign ownership holding value in Saudi stocks witnessed an increase of 128 per cent in 2019 and further 5 per cent in 2020. The increased inflow from both local and foreign investors – both individual and institutional - have played a key role in enhancing the overall liquidity of the market and driving the stock market performance.

Strong affluent client base

While the COVID-19 disrupted the global markets in 2020, the asset management sector in Saudi Arabia weathered the pandemic storm well, owing mainly to the strong affluent client base that could absorb price volatilities not be impacted by liquidity constraints. The asset management industry has reason to be cautiously optimistic about the growth prospects ahead, especially in light of the recent development and deployment of preventive vaccines.

Based on KPMG's analysis of the most recent available financial information of the evaluated asset management firms in Saudi Arabia, 2020 has been a growth year in revenue, profitability and assets under management (AUM). By the end of September 2020, these asset management firms managed in aggregate SAR 471 billion of AUMs, a growth of 14 per cent since December 31, 2019.

“A resilient asset management industry has withstood the two-fold challenges posed by the decline in oil prices and the COVID-19 pandemic, whereby investor redemptions have been limited and asset prices have either been stable or have rebound. The industry is well prepared to play a pivotal role in providing the necessary impetus to the overall economic recovery,” said Ovais Shahab, Head of Financial Services at KPMG in Saudi Arabia.

Privatisation boost

KPMG predicts an uptick in the deployment of necessary capital to start-ups and entrepreneurs through venture capital (VC) or private equity (PE) type investments arising from imminent privatizations and the presence of distressed assets because of the pandemic.

“In line with the global trend, we expect fund managers to offer a diversified investment suite to potential investors as the risk/reward appetite evolves in the market and fund managers shift their investment strategies accordingly,” Khalil Ibrahim Al Sedais, Office Managing Partner at KPMG in Saudi Arabia stated.

Given the tax landscape continues to evolve in the Kingdom, KPMG believes the asset management firms will need to have a robust tax risk management framework to assess and manage any emerging tax risks and expected changes in tax regimes.

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“A continued focus on digitalization and offering tailored solutions to investors will prove to be decisive. Asset managers who excel in these areas are expected to do well in a market experiencing increased competition,” said Shahab.

The continued capital market reforms and astute regulatory initiatives being taken by Capital Markets Authority (CMA) is expected to enhance the transparency, robustness and resilience of the asset management industry in Saudi Arabia.