Fund managers in the six-country Gulf Cooperation Council expect strong growth over the next year, supported by growing demand for Islamic products and investments that take into account environmental, social and governance (ESG) credentials, Moody’s said on Monday.
The ratings agency surveyed eight of the region’s top fund firms’ chief investment officers (CIOs), half of whom expected double-digit growth in net inflows, while a third expected inflows to increase modestly. Moody’s did not name the funds.
“Improved investment results and stronger fees, already comparatively high in the GCC region, will further support revenue growth,” Moody’s said.
Of those surveyed, 80 percent expected investments to increase modestly and 20 percent expected a modest fall.
Around 38 percent the CIOs expect a significant rise in demand for ESG-compliant investments, while half see modest growth. ESG issues were an area of strategic focus for 25 percent of the CIOs, while half said it was of moderate or low, albeit increasing, importance.
“Around 25 percent of the CIOs said they had not yet embedded ESG criteria into their investment management decisions. Most of the CIOs said their firms actively screen out investments considered highly susceptible to ESG risks, but only a small number engage with the management of the companies they are invested in to address ESG issues and shape direction,” Moody’s said.
Over 60 percent of CIOs said Islamic finance instruments - compliant with shariah principles - will see a rise in demand over the next year. Moody’s highlighted that shariah principles include forbidding investments in tobacco, gambling and weapons manufacturing.
“The natural crossover between sustainable investing and Shari’ah-compliant social principles creates opportunities for the Islamic finance industry,” Moody’s said.
Around half of GCC-based funds surveyed by Moody’s said they were open to mergers or acquisitions within the next two years, which the agency said showed the sector’s increasing sophistication and intense competition.
“Respondents’ optimism is tempered by worries over geopolitical tensions, the economic impact of the pandemic, and volatile oil prices.”
The GCC governments’ plans to diversify their economies away from oil are supportive for investment activity, but the region’s performance remains highly dependent on oil prices.
A fall in crude prices could restrict government spending and scale back economic growth with negative consequences for asset managers and stock market returns, which in turn would weigh on funds’ assets under management, Moody’s said.