Saudi asset managers eye diversified investments amidst COVID-19

Asset managers in Saudi Arabia have adapted swiftly and recalibrated investment strategies amid the economic challenges posed by the COVID-19 pandemic.

The asset investment landscape abounds in the Kingdom with affluent clients such as high net worth individuals, family businesses, sovereign wealth funds (SWFs), and other government institutions, which generally have high-risk tolerance and longer investment horizon.

The sector also witnessed robust investment activity in 2019.

However, assets under management (AUMs) held by licensed asset managers (public and private funds, and private portfolios) in Saudi Arabia decreased 4% to SAR 481.4 billion in Q1 2020, according to data from the Capital Market Authority (CMA).

This can be attributed to oil prices, a key determinant of the Kingdom’s economic outlook, to remaining low due to the adverse effects of the pandemic so far this year.

Experts say the Saudi investment sector has traditionally been inward-looking, with asset managers offering a limited range of investment products and focused primarily within the Kingdom and the GCC.

“The historically reactive approach of asset managers in the Kingdom, with high expectations, margins and low risks, have taken a back seat as traditional asset classes come under pressure in current circumstances,” Cyril Widdershoven, global energy market analyst at Verocy and Global Head Risk Strategy at Berry Commodities, told Argaam.

Meanwhile, Vanessa Roberts, vice president – senior credit officer at Moody’s, pointed out a major shift in client assets towards lower risk strategies such as money market investments, fixed income and sukuk since the start of the coronavirus crisis.

“Some investors have redirected equity investments towards companies with stronger cash positions, and industries with more predictable cash flows. We expect investors to maintain a risk-averse stance in the months ahead,” she added.

Potential asset classes

The domestic asset management industry faces steep obstacles, as COVID-19 continues to trigger market volatility and impacts operations and valuations of assets on a near-daily basis.

Diversification away from the region, in addition to alternative investments, has gained traction as a way to mitigate risks among Saudi asset managers.

Several asset classes could prove to be of interest outside the region in the short-to-medium-term, experts say. Jason Liu, head of Chief Investment Office - Emerging Markets at Deutsche Bank Wealth Management expects technology and healthcare sectors to be attractive options based on their long-term fundamentals.

“We also like the cyclical sectors, such as consumer discretionary and industrials, with the economic recovery, as a diversified portfolio is always suggested in an uncertain macro environment,” Liu said.

In the near-term, he stressed on gold prices to have further potential for price appreciation as uncertainties surrounding the global pandemic and a prolonged low-interest rate environment continue to aid the commodity.

Liu expects gold prices to remain high due to support arising out of steady demand for high-yielding assets.

“Precious metals are among the attractive asset classes, given the huge supply of liquidity and the uncertainty of the economic rebounds,” Sohail Hayyan, a Riyadh-based independent investment consultant, said.

He advises investors to target liquid assets to increase flexibility and strengthen positioning in the markets.

Additionally, asset managers should focus on food-related sectors as it still remains undervalued in the region, Widdershoven said. “Investments in food, agriculture or biotechnology are worthwhile [investments] to set up, receive major margins and profits, and have a direct link to the future of the Middle East and North Africa (MENA) region,” he noted.

Investment outlook

Experts say that Saudi asset managers should research and assess other potentially-yielding markets for clients. While the UK, US and China may not offer prospects for high returns on investments at present, markets such Greece, Romania, Eastern Europe, Poland, and the Benelux Union can prove potential alternatives for Saudi investors.

The COVID-19 situation is testing the efficacy of decision-making and execution strategies of asset managers in the Kingdom, along with their ability to proactively manage client’s needs and expectation.

“They [asset managers] should also aim for alliance with international managers to help clients accessing foreign markets through alpha products and in a more informed way,” Hayyan believes.

The coronavirus pandemic has depressed global oil demand, triggering a sharp decline in prices since February. This might also weigh on the kingdom’s asset managers whose customers maintain significant exposure to oil assets.

“Larger asset managers are best equipped to absorb the resulting pressures, which may over time trigger some consolidation between smaller players,” Roberts concluded.

Disclaimer: The views and opinions expressed in this article are for informational purposes only, and should not be viewed as investment advice

Write to Paromita Dey at paromita.d@argaam.com