Truth behind asset management in Gulf

The development of the GCC asset management industry is an interesting phenomenon.

In a very short period of time, it has grown into an industry with significant assets under management, but like an oasis in a desert, its existence can be questioned by some who may consider it to be a mirage.

Current estimates of assets under management vary between $60-65 billion. When you compare that to Hong Kong ($47 billion)) or Singapore ($20 billion*) or even India ($73 billion), you realise its significance (source: Cerulli Associates).

The expectation for growth going forward is quite strong as well. The industry is expected to grow at about 23 per cent over the next five years to reach close to $200 billion by 2012.

We all know about the liquidity in the region driven by oil revenues. But will this liquidity finds its way into the GCC asset management industry? Two macroeconomic factors suggest that this is quite probable.

As of June 2006, global 'assets under management' (AUM) for the mutual fund industry were approximately $16 trillion with a market capitalisation of global equities at roughly $44 trillion.

This implies a global ratio of AUM to market capitalisation of 37 per cent. In the GCC this ratio was only seven per cent versus 25 per cent for the rest of the emerging markets.

Therefore the potential for growth based on capital market development is outstanding (source: Algebra Capital and Bloomberg).

If we compare AUM to savings, the ratio in the GCC is 18 per cent versus 35 per cent-40 per cent for emerging markets and 85 per cent and 100 per cent for Europe and the US respectively.

This again suggests that the industry is poised for growth as this liquidity looks for value in the regional markets.

With GCC deposits at about $330 billion and if we assume an annual growth rate of eight per cent, convergence with emerging markets implies an industry size close to $200 billion over the next five to six years (source: Algebra Capital and Bloomberg).

Google search

Most readers will agree, if you can't find something through a Google search it probably doesn't exist. When you search for the 'GCC' or 'Gulf Asset Management Industry', all you see is bits and pieces of information that allude to its existence but don't tell you much about it - no information on any industry body, about its regulations or about its products.

What this highlights is that despite the size of the industry its development is still in the nascent stages.

However, what should be noted is that there are several developments taking place across the region that are having a positive impact on its financial services.

These include improved regulatory improvment and growth of third party distribution. Also, when you add the impact of the growth of Islamic finance to the mix, the prospects for the GCC asset management industry are extremely positive going forward.

Which is why I am bullish on the growth of this industry irrespective of the performance of the local markets over the short to medium term.

The writer is a Senior Director at Franklin Templeton Investments. The views expressed in the article are his personal opinion.