According to Auguste Kouame, Acting Chief Economist for the MENA Region “The impact of the global financial crisis on MENA stock markets varied significantly from one country to another. On average, regional stock indices have fallen by about 50%”. How does GCC markets compare with other markets globally and what is the outlook?
The interesting thing about the global financial crisis is that the stock markets of the countries that some people say have caused it, such as America or Britain or parts of Europe, actually went down less than the emerging markets. Emerging markets across the board did go down by about 50% or even more; the Middle East wasn’t immune to that. It should be noted that the Middle East stock markets actually stayed higher for quite a bit longer than the rest of the world but eventually they too gave up and that was driven by the decline in oil prices.
People saw that that source of liquidity for the region would dry up. So, the markets here aren’t immune to the rest of the world; their drop has been very similar to other emerging markets.
Perhaps what makes it a little bit harder is that the markets had huge rallies just four years ago so at one point the Saudi market’s capitalisation was as large as that for the whole of Korea. It became one of the largest emerging markets by market cap. So, the Middle East has gone through its second round of market corrections within five years.
What has been the effect of the crisis on Bahrain and how do you assess its ability to overcome the financial crisis?
In some ways, Bahrain has a more open economy than other parts of the Gulf but despite this it has actually weathered the storm better than most. This is partly because the Central Bank of Bahrain made special efforts to sterilise hot money coming in. There was a period in the region when people thought there might be a re-valuation of the currency versus the US dollar, so a lot of speculative money flowed into this region. Not all of the Central Banks sterilized this The Central Bank in Bahrain did offset the money that was coming in and did move to address it.
As a result, we didn’t have the mega liquidity that they had in Dubai or other parts of the region. Then it meant that although the prices of assets such as equities or property were going up, they weren’t going up at the same steep rate as they were elsewhere.
That meant also that when the market has come off, it’s come off more gradually here, it hasn’t been so difficult. So, although Bahrain is open, it has actually been managed in a fairly responsible way.
In your opinion when can we expect the capital markets to rebound in the region and globally?
Firstly, from a global perspective, Robeco sees the end of the financial crisis, at least in terms of equity markets, within view at the moment. However, that doesn’t necessarily mean that we are going to see a rebound or that life is suddenly going to become much easier; it’s going to stop getting worse quite soon.
For the world, this means that we’re not going to have the rapid GDP growth that we’ve had in the past, we’re not going to see the asset inflation that we’ve seen in the past but rather the risk of deflation. If we look out of this picture, which could possibly continue for another two to three years, and look at the example of the Great Depression from 1929 to 1933, there was extreme volatility in the stock market. There were 15 occasions in the 3 year period when the market went up by more than 30% or fell by more than 30%.
We say that the financial crisis is probably approaching the bottom, we will see sharp rebounds. It’s also likely after a shock like this that people aren’t certain of what valuations should be, they lose confidence quickly and you see wipeouts as well.
It’s going to be a difficult environment. That said, if you look at the Middle East within a global context, we’re very fortunate.
The IMF, in their most recent predictions, forecast that China, the Middle East and Latin America, because of commodities, will do better on a relative basis than the rest of the world. Their growth will be faster and they’ll return more quickly. That, of course, is a good thing for Bahrain and it’s a good thing for the GCC and the MENA region.
During the 9th GCC conference you mentioned “investment decision made now will be amongst the most important for the decade”. Can you describe the key challenges and opportunities associated with investing during the global economic downturn?
One of the things that we have to question is that if you survived the recent crash then you’re ok. What we saw from the Depression period is that one of the richest men in America at the time, the founder of General Motors, Durant, liquidated all of his investments shortly before the Wall Street Crash, so he looked very clever. Within two years, he had then lost everything by investing again too early and the market had gone down. So what I mean by saying that this could be the most important time for making an investment is that in periods when people aren’t sure of exact evaluations and where confidence is very fragile, the market can react in both ways. So being discriminating and knowing exactly what you want to invest in and really finding value and having confidence to stay with that is going to be key.
From our perspective, we think that there are certain areas which will continue on a secular growth path but most of them are fairly clear; the emerging markets such as China are definitely going to continue to grow in the long term. There’s very little doubt when you see the continuing purchasing power, GDP and population growth of India and China – you can’t argue with demographics. But again, you need to be discriminating; in 50 years, China is going to have the oldest population in the world and that will present other challenges. You don’t necessarily want to be investing in baby clothes in China, for example! Another area where we think it’s very clear that people need to invest is renewable energy and sustainable types of investment. The companies now who take additional risks and are shortchanging on environmental, social or corporate governance standards are going to be punished; people are going to avoid companies where they’re worried there will be a corporate governance scandal – we’ve seen enough of that.
People who’ve been victims of poor corporate governance are going to punish people who do it again. So, within the investment world, there is going to be a very strong secular trend to responsible investing, which we think is going to have a cyclical pickup, and likewise, on renewable energy and agribusiness. This is again related to emerging markets because of the population growth in those markets and the need for more power and more food. Those areas have already started grow and will continue to do so. It’s a long term secular trend that is being accelerated, particularly on the renewable energy front, by fiscal stimulus, whether it’s in America or China. Even here in the Middle East, there are a lot of Gulf countries that are saying we want something to do when the oil runs out: peak oil is 2035. The Gulf is blessed with an abundance of sunlight, more than anywhere else in the world, so it’s a very obvious way for them to diversify.
Aren’t you worried that with the global economic downturn, we will see more regulation in the markets?
There can be good regulation and there can be bad regulation. This is a personal opinion rather than a Robeco view, but if you look at what led to some of this crisis; it was a lot of box-ticking. For example, in America, they had a rules-based regulatory system. This is a risk we in the finance all share: if you have rules and people can tick those boxes, they’ll say we’re ok. I think if you look at most of the companies in America, with a few of the fraudulent exceptions, you will see that all of the boxes were ticked.
Likewise, in Europe, you have Basel II and the regulatory framework, which said that tier 1 capital included certain categories of credit.
So the financial community structured credit to meet the Basel II regulation, and suddenly we had AAA rated CDOs, which have now unwound and become part of this problem. So, do I think that regulation is a solution? Not that kind of regulation.I view that kind of regulation as being part of the original problem, and if we try to write more rules then I think we run the risk, in ways that we cannot foresee now, of future problems. If government could write the rules that fixed everything, then the Soviet Union and Communism would be the model by which we’re all running today but it’s not, and although capitalism does have its difficulties, no one is suggesting that we go to a USSR style economy.
Despite the uncommonly harsh conditions, Robeco managed to realize cash inflows of around €600 million in 2008. How does your performance in the Middle East benchmark against your global performance?
€600 million of gross inflow were here in the Middle East. In the rest of the world, Robeco actually managed to increase its sales by an even larger number. So, I think if you were looking at Robeco in the Middle East and the market environment we were in, for us it was more favourable for longer than it was in other markets. In that sense, our benchmarking seemed quite favourable and we probably accounted for about 10% of gross inflow.
As a whole, however, the Middle East is still a market with a lot of potential; we’re starting from a low base. Our assets within the Middle East are only about 1% of our company as a whole so a higher proportion of the growth of Robeco comes from the Middle East, India, China as well as, perhaps more surprisingly, from a mature market like America. As a proportion, there’s still a long way for us in the Middle East to go.
What risk management tools do you have in place to monitor risks?
We raise money here and invest it in the rest of the world. So the risk management we have in place is in our portfolio risk management centres in the Netherlands, America, France and the Far East. The risk management that we have is appropriate to each particular asset class. For equities, we will be looking at the quality of the companies; not just the financials but also their business model – have they got a sustainable future?
These days, we also look at whether or not they can finance themselves during the crisis.
On the fixed income side, we look at credit risk, risk of default, interest rate change risk and currency risk – getting currency right has been an important source of out-performance for us on a fixed income recently.
Other types of investments we do are private equity, fund of funds and we also do manage futures where we are strong. So managed futures is making sure that operations are very strong, that there is liquidity in the market and that your trading model is being programmed and updated on a regular basis.
For private equity it is much more about visiting the funds, making sure that they not only subscribe publicly to responsible investing criteria, which is very important for us, but they also do that in the real world.
Has the crisis changed the way you assess the risk?
I think it means that we look much more at liquidity, you can have a great company but if the cash flow is such that they cannot survive for 2 or 3 months without sales then that would be a concern for example. So that’s one way that problems have increased, we have reinforced our belief in responsible investing for pricing in externalities. If you are a polluter then the risk of getting caught out now is that will be punished more by markets. I talk about corporate governance, social and environmental risks in the same way.
How would you characterise the management style that governs Robeco?
Robeco can be described as a multi boutique or multi-specialist investment house. Rabobank, our parent is the world’s largest agricultural bank and is triple A rated. They succeeded because of their focus on what they do well. Over the last ten years they took bought into Robeco to have a pure asset manager, so we’re an asset management player and that’s what we focus on to do well.
If there is an asset management capability which the market has demanded then we in turn have purchased a specialist or boutique in that particular asset category. If we’re entering a new market then we actually look to buy a boutique, which in a way we were, focused on one thing, one of our boutiques is Boston partners, it ranks in the top 5% of US value managers by performance.
As a company we’re style-neutral so when we invest in a boutique and we take that to our clients we want that boutique to stick to what they believe in and remain focused on it. So for example with Boston Partners it’s very much value driven which works for them very well. However in Europe our managers might be more growth orientated. In our emerging markets we have greater growth bias because we see growth as something you can actually see more clearly in emerging markets. So the style we have is driven by each individual boutique rather than one house style trying to fit over every single asset class.
The Robeco Middle East Conference attracted about 50 senior figures from Gulf-based Sovereign Wealth Funds, Central Banks and other financial institutions. Would you be able to tell us what the conclusion was? What was the message?
The event was very stimulating. We were actually looking at the crisis, we were trying to establish a feel in the market for whether you should be a bull or a bear, whether you should be positive about the future or whether things were so bad that the only thing you could do was buy into US government bonds and sit on what is said to be the world’s safest asset. I’m pleased to say that this group of very senior investors from actually came out on the positive side.
In fact they overwhelmingly came out on the positive side. We had a straw poll which isn’t at all scientific but something like 70% of the audience actually thought there was a future and that that future would be positive. So although most of our speakers had been talking about the risks, whilst people acknowledged the risks and the dangers of what’s going to happen, they felt that there will still be opportunities and that people here in the Gulf would be able to benefit from them. So that was very encouraging, it was a great conclusion.
And what are the opportunities?
Well for some clients we’re looking at emerging market equities. As with all investing, there’s actually a debate. One argument says that America went into recession first and it’s therefore going to be the first to come out and also that American companies tend to invest in the rest of the world so that they are an access point for a renewal in global growth. The other view is that emerging markets are the ones showing the real GDP growth, that they are the markets with the long-term secular uplift.
So there are some people who want to go for an emerging market’s portfolio. I’ve also talked a lot about responsible investing and renewable investing: clean tech private equity funds are talked about. And for those who don’t know, or want to predict an increase up or down then we have managed futures - the black box that can take advantage of medium term trends - anything that lasts longer than 5 weeks can be taken advantage of by a managed futures fund. So there were opportunities for almost everyone at the conference. It was very positive.
How are Robeco’s potential investors and clients behaving since the start of the financial crisis?
I think for our portfolio managers, they’ve been much more careful and for our customers it’s been exactly the same. Fortunately we’re in a very rich area so although people lost money – I think the average loss in this region is something between 15% and 25% – their asset base had increased by substantially more than 2008’s losses over the previous years with the rise in oil prices. So although people have been hit, if you read about the losses there are phenomenal numbers but many investors are still at levels that match the start of 2007.
So there’s caution but there is also this awareness that they more than other regions and more than other professional investors can actually take advantage of cheapness.
There isn’t a pullback in the market, there is very much a focusing and there is a view that they shall be careful about entering too quickly, we ourselves secured our first large mandate of the year just last week whereas last year we probably had a number coming in quite frequently.
After Lehman Brothers collapsed people said well we are going to sit and we are going to wait and see and now we’re actually seeing a resumption of activity which is very promising.
That brings me to the next question: do you see a lot of interest from investors and clients investing with Robeco here in the Middle East?
Robeco has been here in Bahrain since 2000, we’re a known name but because we work with institutions and the very large investors we’re not a household name. What has made it different for us in the last year of two is that we’ve increased our resources for the Middle East so here in Bahrain we’ve increased the size of our offices, we’ve increased our partnerships.
So for a long time it was a very small representative office. Now in the region we’ve got 7 people here in Bahrain, we’ve got partners throughout the region who’ve got another 40 and Rabobank itself has got nearer to 250 people in the region. So in the last 2 or 3 years Rabo Group and Robeco have both increased their position here.
This is leading to new business, more people are aware of us and also because Rabobank is the only large independently owned triple A bank in the world and right now people value that conservatism and they value the fact that we’ve got a very secure and stable parent.
How would you describe your communication strategy in attracting investors?
For us and for this business it’s actually about knowing a limited number of investors. So there are two parts to that: one is knowledge transfer which for us is the most important part and then the other part is very select branding and marketing coming from Bahrain and moving it to the rest of the Gulf.
On the knowledge transfer, we have 4 events each year. Our Middle East investors’ conference was a perfect example of executive knowledge transfer right at the most senior level. We have a summer university in Amsterdam in June where we’ve got Lord Nicholas Stern, the Noble prize winner for climate change talking about the economic impact of environmental change, we have professor Feldstein, who is an economic advisor to Barack Obama who will be speaking again and we have asset allocators from Harvard.
The four events are completed with one at Harvard and with Rabobank we also have the World Bank and IMF annual conference which this year will be in Istanbul. Invitations to these events are made directly to senior managers in the region and we also selectively work in terms of communication and marketing with organizations within Bahrain who are well connected with the rest of the world and the Gulf.
As an example we work very closely with Bahrain’s’ Economic Development Board. They view us as a foreign company trying to do business in Bahrain so they are supportive, we also work with them to talk to other businesses that may be interested in working in Bahrain.
For example at the Grand Prix we attended the EDB’s event and we actually sponsored one of the cars raced by one of the local Bahraini drivers and a manager at the race track. Of course we made sure that the car was carbon neutral! This is very important for us. We also work with the leading investment and economic publications.
So within the region you’ve got The Gulf magazine which is very good obviously, I call it The Economist of the Middle East and there are other publications like Arabian Night where you have the regions leaders profile. In Bahrain you have a small enough community that we’re able to work with each other. Whether it’s the media or whether it’s the Government, the Central Bank or the Economic Development Board we work together in partnership.
You mentioned that your conference was held under the auspice of the Central Bank of Bahrain and as a private company how do you assess the corporation interaction with CBB and other public entities? And from your experience is Bahrain business friendly?
I think Bahrain is very committed to being business friendly and I think the leadership of Bahrain is very business friendly. It would be difficult find another country know so well as Bahrain where you have the same level of Government access and support. I think the level of access and support you get here is probably exceptional and I’ve worked in Hong Kong for 10 years and here we work closely with people in Dubai and other jurisdictions in the GCC.
The speed with which we could meet with someone in the Central Bank, Economic Development Board or if we wanted to talk to someone at the local telecom provider or the CEO of the local Airline, Gulf, is all surprisingly fast in Bahrain. You could argue that it’s because it’s a small place and proximity really helps, I’m in the World Trade Centre and there’s probably no government ministry which is more than 10 minutes away.
At the same time though it’s not just proximity it’s also a willingness and an openness of the government to come together. So I think that’s a strong advantage for Bahrain and I think Bahrain’s planning is probably some of the strongest in the region. They know what they want and they’re driving towards it. Of course not everything is perfect and there are plenty of things I could talk about where I could say this would be good if it was done differently but also it’s a reasonably free society so you can actually express and make your complaints known as well.
For instance, what can be done to facilitate your operations?
We’ve been in Bahrain for 10 years and I think some of the things that Bahrain could help with are the linkages to other parts of the Gulf. So actually Bahrain is very well connected internationally, the media here and the connections here can help you on your way to Saudi Arabia but I think active intra-Gulf cooperation and push from the Economic Development Board or from the Central Bank could probably be more aggressive.
They would argue that their main job is to actually promote inward investment into Bahrain but it’s my belief that increased intra-Gulf trade will also benefit Bahrain. Another part which is being addressed is education and training. The phrase Bahrain-isation is the percentage of Bahrainis in the workforce. It is very high by Gulf standards so the percentage of Bahrainis born and grown up here and then working is much higher than say in Saudi Arabia or the extreme example of Dubai.
However, the workforce needs to be more thoroughly integrated and that’s not just the job of government or the companies because everyone is actually very open to it. It’s a lot easier to employ someone who lives here than importing someone from Britain or India so it’s a challenge too for the population of Bahrain to actually take the opportunity available to them.
You mentioned before about renewable energy as an area to invest also an area of growth, you also talked about what you’re doing at the Formula 1. What is Robeco’s Middle East policy in terms of sustainable development?
That’s a good question. If we look at Rabobank and Robeco they are well known in France for sponsoring the Tour de France and one of the teams in the Tour de France. That is very sustainable and renewable provided you eat enough and your legs can survive the competition, the reality in the Middle East is that this regions wealth comes from hydrocarbons and the use of the car, the use of hydrocarbons for other industry.
So we at Robeco aren’t an exclusionist type of manager, we don’t say don’t invest in this or invest in that, what we say is if you invest in a particular area, for example oil companies that have a poor record of transporting oil then sooner or later there will be an accident and the money that you’ve invested in that share will possibly go down. So what we say is: let’s look at all the factors, not just purely financial but the externalities as well. In the Middle East this is a message that is very well received.
There’s a contrasting view which has been held for a long time and its evidence is the level of the emissions, the emissions per capita in Bahrain and Abu Dhabi are amongst the highest in the world and the old view was: we make our money from oil, we support oil so we should buy the biggest car we can so we can help our economy. The newer view is to say well oil will run out, we do know that we are blessed with sunlight; we are blessed with wind, long coastlines and large amounts of unused land in the desert so these are resources which can be harnessed.
Within the region people are turning and are actually saying: its not just a nice thing, we’re not doing this because we are being told by somebody in Switzerland that we should have cleaner air, we’re doing this because we can actually see it’s our future. Now we can see they are moving into renewable energy, from Robeco’s perspective we are aware of both: the old view and the new view.
The Formula 1 must be one of the most hydrocarbon intensive activities there is, Abu Dhabi is opening a Formula 1 racetrack which opens in November and at the same time Abu Dhabi has set up Masdar City, the carbon neutral city which will be less than 20 miles away from the Formula 1 racing circuit, they are doing both.
Here in Bahrain the environmental awareness is strong, not only is the Formula 1 carbon neutral on a global basis but here in Bahrain they actually have a particular commitment to environmental awareness, they’re using some of the money and they are turning it around into green; every single one of the Bahraini cars at the Grand Prix had big “Go Green” stickers on them.
You can laugh and say this is contradictory or you can say we all live in the real world and there’s nothing sustainable about a company that makes losses, if you’re going to be good you also have to make money and the gradual change from a hydrocarbon economy to a renewable economy is one that I think should be encouraged, it can make money for people and its gradually occurring. We’re following that rather than being out in front and being too prescriptive and saying put all your oil back in the ground.
To conclude: you were appointed in the second half of October 2007 and coming with international experience what has been your contribution so far and what would you like to see achieved and what would you like to say to our listeners about Bahrain?
I think I’ve actually been here for almost 2 years now. In that period in Bahrain I would say that I’ve been surprised not just by the opportunity from oil but the openness to invest around the world, the openness to invest within this region and the consciousness of the people within the region that the investment is not just quick money, it may have arrived quickly but this is money which comes with responsibility and there’s a keen awareness that they should invest this for the future in a sustainable way.
It’s also encouraging to see that there’s a very strong level of professionalism, I think there were times before when people thought that Arab money was new found and that if you couldn’t sell something elsewhere then you would come to the Middle East and you could sell it to a newly rich Arab. I can absolutely say that some of the most professional investors and some of the most demanding investors in the world are in this region.
Many of the Gulf’s leaders and have a strong commitment to great finance, to great investment and to improving their nations economically, socially, politically and environmentally. It’s not going to be easy, it’s not going to happen overnight and the populations as a whole have to catch up and perhaps become more integrated but this region is definitely moving in a positive direction.