The Middle East has established itself as a financial hub creating a link between emerging markets in the east and the west. It is worth noting that with almost all countries in the region dominating the global oil market has led to the rise of high net worth individuals and families in the region.
Over the years, an increase in creation of wealth has been seen in the Middle East—leading to a profound growth in its wealth management industry. According to a new study published by global consultancy Oliver Wyman and German investment bank Deutsche Bank titled Out of the pit stop—into the fast lane, growth of high net worth individuals in emerging markets will exceed the growth in developed markets until 2023.
The study showed that Asia-Pacific, Latin America, the Middle East and Africa (MEA) and Eastern Europe will account for over half of global wealth growth over the next five years. In 2018, global high net worth wealth growth grew to $70 trillion at a rate of 4 percent.
For the Middle East, the study observed that private high net worth wealth in the MEA region is expected to grow by 6 percent annually until 2023. Only private high net worth in Asia-Pacific is expected to grow at a higher rate of 9 percent. This highlights that their wealth management sector in the Middle East will provide significant wealth for wealth managers in the years to come. Also, experts predict that digitalisation will revamp the industry in the next decade or so.
Stock market access to foreign investors will increase wealth
In the Middle East, most assets remain in the hands of very few ultra high net worth individuals. The rise of the wealth management industry in the MENA region is caused by the better than average returns to oil investments. The substantial growth in wealth in the Middle East in the last two decades has caught the attention of foreign or western wealth managers.
Ali Janoudi, Head of Wealth Management Middle East & Africa and Member of GWM Executive Committee at UBS, a Swiss multinational investment bank and financial services company and the largest Swiss banking institution in the world, told International Finance, ”We are in agreement that the Middle East presents a sizeable opportunity for both asset and wealth managers in general. Today, residents of the region still represent fortunes that are growing faster than in any other part of the world. Again, in the current environment we should approach such statistics with caution as the most recent events like the drop in oil price have not yet been factored in, but a significant part of the world’s wealth is concentrated in regions across the MEA, which is why at UBS we consider them strategic markets.”
In present day, the world’s top wealth managers have their offices setup in the region. The oil and gas financial boom has created several sovereign wealth funds and a vast amount of wealth for individuals and families. Boston Consulting Group, for instance, predicted that private wealth for both locals and expatriates in the MEA region is expected to grow at an average rate of 8 percent annually and reach $12 trillion by 2021. However the landscape has started to change in the last couple of years.
“If we are looking for major contributors, then obviously private wealth growth and the development of the wealth and asset management industry go hand in hand with the economic development overall. The local and national governments of the GCC nations in particular have continued to align regulation and transparency with international standards, which includes giving access to their stock markets to foreign investors,” Ali Janoudi further explained. “That is an important driver of local wealth and an important accelerator for the financial sector. In addition, the Middle East is home to some of the largest sovereign wealth funds, which are important clients of the leading investment banks.”
Covid-19 and depleting oil prices to impact wealth creation
From an economic point of view, both the pandemic and the depleting oil prices are considered as an opportunity for governments in the Middle East to continue their diversification away from oil, as well as finding other revenue opportunities to invest in local and social infrastructures. Many countries in the Middle East such as the UAE, Oman and the Kingdom of Saudi Arabia have taken significant steps to reduce their economy’s dependence on oil.
Huge investments have already been made in the energy sector, especially in solar energy, even before the pandemic and the oil prices began crashing to its lowest value in the last two decades.
How are these factors anticipated to affect the Middle East wealth management industry?
In this context, Ali Janoudi said “The pandemic has caused governments to implement social distancing measures that affected the economies in the region through their impact on global growth, domestic consumption and investment—and a nearly unprecedented energy demand shock. These factors will likely weigh on the wealth creation in coming quarters, adversely affecting the wealth management industry. However, we expect containment measures to be gradually lifted in the coming months and to end in the second half of the year. If this happens, demand for energy should increase, as mobility restrictions are lifted and more workers will use cars instead of public transportation for their commutes. Overall, headwinds might slowly shift into tailwinds, although it will likely take years to fully recover the wealth loss.”
The sudden suspension of global activities has forced governments, companies and private individuals to tap into savings and liquidity buffers to bridge the gap in income. It was not unusual that private and corporate clients had to liquidate assets to remain current with their ongoing obligations. “Luckily, foreign bond investors remain very willing to invest in the region. Although we mainly saw the higher rated issuers taping international capital markets, most bonds were many times oversubscribed. Hence, there was less of a need for governments to rely on local savings,” Ali Janoudi added.
Technological change is likely to remain disruptive
The challenges associated with Covid19 are unprecedented. It is observed that oil prices are at their lowest in a decade forcing major restructuring and sometimes even driving people out of business. Tourism and real estate which are undoubtedly important for business hubs such as Dubai are currently dealing with challenges. These reasons combined create a difficult economic environment which in turn could have repercussions for the wealth management sector.
“Macroeconomic instability may also trigger events that will force wealth managers to look at their business models and forecasts, as well as the way we do business. Take technology for example. Technological change is likely to remain a disruptive yet positive force over the coming years. Many innovations are being driven from within the Middle East itself,” Ali Janoudi said. “Digitalisation will dominate the decade ahead in wealth management, and is crucial in serving clients and advisors as we seek to achieve greater personalisation and a more tailored experience based on each client’s feedback. We have seen for example more than 3,000 people from the Middle East attend in the last few weeks our webinars presenting the latest market outlook.”
However this does not mean wealthtech can replace advisors. Human touch in wealth management will remain intact because managers discuss very personal topics like succession planning and values driving their clients’ choices. That said, investment in wealthtech paves a way for client advisors to deepen the relationships they have with their clients and that in turn might increasingly become a differentiating element for the wealth management industry in the Middle East and rest of the world.
All of this will depend on when the pandemic ends. “As wealth managers, clients have never needed us more than they do now, and we are in a position to help them navigate uncertain times and maintain their confidence in their investment portfolios. Interest in wealth planning and succession, along with the possibility that social distancing becomes a long-term way of life means that those wealth managers who can truly offer a full range of services through sophisticated digital platforms are the ones that will stand stronger and grow,” Ali Janoudi explained.
What does this mean for the industry in the Middle East
The wealth management industry in the Middle East presents a positive outlook. Economic diversification in the region and a new fast-paced shift in technology will create massive opportunities for wealth managers. Also, it will simultaneously create an environment to work with more certainty and ease.
“Where there is wealth creation and growth, it is natural that the wealth management industry will follow suit and thrive. We see the younger, affluent generation emerging who are both tech-savvy and keen to invest sustainably. I believe we are in a good position to offer them exactly the services they need,” Ali Janoudi said.
“Many of our Middle East clients have been banking with us for decades, and in some instances we are advising third generation clients on how to position their portfolios, protect their wealth and even plan for the fourth generation. Taking the long-term view does not just apply to investment portfolios—banks, like UBS, that have acquired the deep knowledge, trust and reputation over these many years in the Middle East are in a position to know how to work with global trends within the local context,” he concluded.