Interview: Nazem Al Kudsi

What effect has the slowdown of Western economies had on institutional investors’ appetite towards the Middle East and Africa (MEA)?

NAZEM AL KUDSI: Due to uncertainties in the global economy, institutional investors have been very risk averse in the last four years, but there are clear signs that they are looking to new growth markets, such as in the MEA region, to help lift returns. A survey of 158 global institutional investors, commissioned by Invest AD and carried out by the Economist Intelligence Unit, showed that almost one-third intend to allocate about 5% of their assets to Africa in the next five years, indicating there will be significant flows of capital to the continent.

Investors realise that the MEA region is undergoing similar changes to those experienced by East Asia in the 1980s and China in the 1990s. In many countries, economic expansion is underpinned by natural resource wealth. However, the entry of new capital to the MEA region is likely to be a medium- to long-term phenomenon. Capital markets need to develop further to be able to absorb larger amounts of capital. This is still a challenging time because global markets continue to frequently switch between risk-on and risk-off modes, usually depending on decisions made by monetary and political authorities in the US and Europe. Despite the high potential for growth, the region’s markets are still influenced by fluctuations in global capital.

In what ways has political turmoil in the region influenced the investment climate and strategies?

AL KUDSI: Social change often comes fast and unannounced, causing disruption to people’s lives, governance and decision-making processes. But in change there always lies opportunity. I think historians will look back upon the 2008-09 global economic crisis as a turning point for the whole world, and the changes in MEA in 2011-12 will be one component. It is clear that provision of jobs and a decent standard of living are among the key challenges all policymakers face. In the MEA region, this should encourage private investment and a move away from direct government involvement in the economy, whether through state firms or subsidies. I think we will see improved governance across the region and more investment-friendly policies.

How would you characterise Abu Dhabi’s positioning as an investment window for the MEA region?

AL KUDSI: Abu Dhabi is well positioned as a window to the wider region because it has a long history of positive engagement and investment across the MEA and has developed extensive global financial linkages. In my experience, Abu Dhabi companies are welcomed because we have a long-term view on investment and believe in fostering lasting relationships. Our experience in building a modern, diverse and open economy is respected, and also helps us understand the challenges facing emerging economies across the region.

How much weight should be attached to the frontier versus emerging market distinction?

AL KUDSI: Although many institutional investors may have little or no exposure to frontier markets because of constraints imposed by their investment mandates, I think the distinction between frontier and emerging markets will gradually diminish over time with greater flows of information. The asset management industry in frontier markets has seen a shake-out since the global economic crisis, leaving a smaller and much more professional group of managers. For example, Invest AD has established undertakings for collective investment in transferable securities (UCTIS) IV-compliant funds, our funds reporting is compliant with the global investment performance standards, and we are employing best practice by engaging third-party service providers for custody and funds administration. We take the frontier market investment story directly to institutional investors, supplying a constant flow of information, and even taking them to the markets where we invest. Essentially, professional asset managers can help to reduce the risks of investing in frontier markets.