Foreign and local banks are rushing to take advantage of a booming market in private wealth management as ever more people in the Emirates join the ranks of the world's hyper-rich.
A number of private banks are expecting Asia and the Middle East to account for a tectonic shift in the world's wealth - not only in terms of new millionaires, but also new opportunities for the canny investor to make a profit.
Although the recession has impacted the finances of investors in Dubai and Abu Dhabi, heads of private banks say their clients could emerge even wealthier if they play their cards right. The Capgemini/Merrill Lynch World Wealth Report 2010 found that wealth in the UAE had been hit hard by the impact of economic difficulties in Dubai, with the 48 per cent drop in real estate prices resulting in the number of high-net-worth individuals shrinking by 19 per cent.
"The rate of growth in the size and wealth of the Middle East's [high-net-worth individual; HNWI] population was slower than in other regions, largely due to the impact of the Dubai crisis and the modest performance of key drivers of wealth," the report said. However, local fortunes appear to be on the mend. Credit Suisse is betting heavily that growth in the Middle East and Asian private banking sectors will outstrip traditional European markets, with the Middle East accounting for a "majority" of growth, while Swiss bank Lombard Odier told Reuters that it expected its business in the region to double in the next year.
While foreign banks, such as UBS and JP Morgan, once accounted for the majority of wealth management in the Emirates, local banks have started to catch up. Emirates NBD was among the first of the local banks to develop a private banking arm in the summer of 2009, but others are joining in, with Abu Dhabi Islamic Bank and Falcon Private Bank looking for a foothold in this lucrative market. As private banking becomes more competitive, the market has been shaken up by the arrival of new financial products from Western markets.
"An investor here has been to school for the last 10 years," says Alan Durrant, the chief investment officer of National Bank of Abu Dhabi (NBAD). "Clients have been exposed to a vast number of investment products. "There's still a long education process to go through, but this region has educated itself enormously as more and more financial products have been promoted by banks and investment businesses."
A new type of investment that has attracted a great deal of attention has been exchange-traded funds (ETFs). Composed of stocks and derivatives, ETFs track an index or a commodity like a fund, but fluctuate in value similar to equities. They offer an easy way for an investor to gain exposure to a variety of asset classes, from tech stocks to commodities to emerging markets. Following a rocky start, the NBAD OneShare Dow Jones UAE 25 ETF has increased 16 per cent to Dh4.81 in the past three months, a movement that Mr Durrant says has "awakened interest" among UAE-based investors.
Credit Suisse also recommends ETFs, especially to gain exposure to emerging markets, saying that many of its clients have been adopting more adventurous strategies because of unusually precarious levels of economic growth worldwide. Walter Berchtold, the head of private banking at Credit Suisse, says consistent returns will continue to be hard wrought for investors. As a result, he says investors will seek a hands-on approach in management of their wealth.
"I don't think we're living in a world where buy and hold is the thing to do for quite a while," Mr Berchtold says, adding that retail investors who fled stock markets at the time of the Lehman Brothers collapse could start returning within the next few quarters. "From an overall point of view, the cheapest you can find is still equities. Are we going to see tremendous bull markets? No. I think the only bull market we've really seen is bonds. We'll have sideways markets for some time to come, but [they] can have great trading ranges."
He recommends that Gulf investors focus first on currencies, then on individual sectors or stocks. "I think the most important thing to get right is your base currency. Don't own dollars. The dollar could see a big devaluation." That outlook may sound alarm bells for investors in the Gulf because currencies in every GCC country except Kuwait are pegged to the dollar. A decrease in the value of the dollar could spell inflation in the Gulf, as imports become more expensive.
"It's just the sheer burden of debt out there. They're going to have more quantitative easing, they'll have to print money and monetise their debts by devaluing the dollar. It's very simple, and that's going to be the driver." Mr Berchtold suggests that investors stand to make considerable returns by hedging their currencies against the changes in the world economy. "What you want to own is some of these up-and-coming currencies, as well as the traditional ones - so you'll want euros, Swiss francs, Australian dollars, New Zealand dollars, Canadian dollars and some of the more emerging currencies like the Brazilian real and some of the Asian currencies."
"You want to have some exposure to [the yuan]," he says. "The [yuan] will strengthen in a very controlled way. The global economy has shifted and with that, the currency trends will shift." Bruno Daher, the regional head of private banking for Credit Suisse, says regional investors are increasingly finding strong returns by building links with emerging markets close to home. "They look at other regions [that] are similar to them and have very high growth - there's a lot of focus now on Asia, but there's a lot of focus on Turkey."
Mr Durrant disagrees, saying currency is not as important as the balance between cash, equities and bonds. "In general, the most important thing to get right for [clients] is the structure of their portfolio," he says. "A lot of people start at the micro level, thinking shall I buy Emaar or Aldar. But we think you should start at a broad level. A lot of people try it the other way around, focusing on what sounds like the exciting bit, the individual stocks. But that's the last bit of the conversation."
Mr Berchtold says corporate bonds are in a poor position, with poor yields on offer at relatively high prices. Bonds have experienced a bull market worldwide in recent months, pushing bond yields to new lows. Yields are inversely correlated to bond prices, meaning that the total return on a bond is highest when the price is low. However, Mr Durrant notes that bonds in local markets, including the UAE and Qatar, are attractively valued and are likely to provide safe cash flows for the foreseeable future. "We think there are certain things that are probably mispriced pretty close to home," he says.
"Local fixed income is under-researched and undervalued. It's largely due to a disconnect that's been caused by the ratings agencies. Following the events in Dubai a year ago, ratings agencies have reacted by downgrading local companies and their debt. "In our opinion, they've completely overreacted and are failing to see how profitable these companies are," Mr Durrant says.