Interview: Khalifa Mohammed Al Kindi

What is the likelihood that sovereign wealth funds (SWFs) will diversify away from traditional developed markets and into emerging markets?

KHALIFA MOHAMMED AL KINDI: Generally speaking, growth in emerging markets is set to be higher on average than anywhere else in the world. While the global financial crisis may have increased volatility in emerging market indices in the short term, due in part to increased risk aversion among investors, the outlook is positive for the long term. This is due to a perceived shift in economic leadership towards emerging markets, and their strong underlying fundamentals. Along with an increase in confidence, emerging markets are expected to attract more foreign direct investment (FDI) and generate higher returns for large long-term investors such as SWFs.

SWFs will mostly be focused on the East, specifically Asian markets. While Africa will generate interest, Asian markets are far more capitalised, and their greater relative depth of sophistication gives investment funds a diversity of products and assets to choose from. Even so, despite its more volatile economic and political situation, Africa is rich in natural resources and has a large population base. Therefore, certain countries in Africa will generate interest from smaller funds in the short term and larger funds in the long term, provided that FDI continues to propel these economies forward. This is not to say that SWFs should significantly alter their exposures and make a single bet on emerging market growth. There will be a steady shift of allocation away from developed economies towards emerging markets, specifically for those seeking long-term gains.

How important is a transparent legal framework for SWFs when assessing investment opportunities?

AL KINDI: When SWFs assess investment opportunities, their most important consideration is expected return, which is a function of growth. However, the absence of transparent legal regulations and good corporate governance can significantly deter investment decisions. Given the state of transparency in emerging markets, it is perhaps unfair to compare them to the standards of more developed economies. Ultimately, such risk factors have to be reflected in the asset allocation weight towards the particular market an investor is looking at. That said, emerging markets are still forecast to yield the best expected returns over a long period of time, as compared to more developed economies.

To what extent will the MSCI’s decision to classify the UAE as an emerging market further position Abu Dhabi as an eligible destination for investment?

AL KINDI: The MSCI’s decision to grant an upgrade in status to the UAE is certainly a welcome development for Abu Dhabi’s economic future. As a result of the upgrade, more funds will be passively invested into the economy. Overall, the local markets will see an injection of much-needed liquidity, and if that continues there could be a surge in the number of initial public offerings. This would be a positive step in adding much-needed depth to local capital markets, and would be key for attracting foreign institutional investors.

Moreover, the creation of a financial free zone on Al Maryah Island will also have a positive impact in attracting the interest of foreign investors. While Abu Dhabi has already successfully attracted many large foreign banks to operate in the emirate, this new offshore unit will further solidify its status as a financial hub. The infrastructure currently in place is of the highest standard and the offshore financial centre will accommodate niche services rather than mass market services in segments such as investment banking, asset management and commercial banking, as well as local banks.

It is equally imperative on the soft infrastructure side that the Abu Dhabi Global Market (ADGM) adopts a legal framework that adheres to international standards.

There has been significant interest on the part of financial institutions from all over the world, including from US, Chinese and European financial institutions, to establish a presence in the ADGM. A strong legal framework will provide the assurance these groups require.