The GCC asset management market is projected to grow, reaching about $500 billion in onshore assets by 2026, a leap from $400 billion at the end of 2022, Strategy & Middle East, part of the PwC network, said in its latest report.
Despite global market complexities, the GCC asset management industry exhibits robust growth potential, driven by strong capital inflows, favourable oil prices and substantial trade surpluses, the report said.
Wealthy individuals are also attracted to the region, with the UAE previously projected to attract the most millionaires worldwide in 2022. Additionally, an increased appetite for IPOs saw the Middle East raise a record amount in proceeds, exceeding $20 billion in 2022.
Today’s complex economic environment is leading many global asset managers to reconsider their investment strategies.
“Rising interest rates; tightening liquidity; the fallout from high-profile bank failures; and increased competition for environmental, social, and governance (ESG)-related investments are pressuring the asset management industry to adapt quickly,” the report pointed out.
These developments come at a time when asset managers face increasing challenges in generating alpha (above market average returns), while their traditional business models are struggling with declining margins, digital disruption, and competition for talent.
These global trends are amplified in the GCC countries and the GCC region has limited participation of institutional investors in the capital markets, an underdeveloped savings culture, and investors with a preference for offshore investing.
Benefits from Tailwinds
However, business development in the region also benefits from tailwinds. In recent years, there has been a strong capital inflow into GCC countries due to favourable oil prices, along with record growth in initial public offerings (IPOs). The region’s asset management industry is also becoming more competitive with offshore investing thanks to increasing sophistication in product offerings and supportive regulatory initiatives.
“These trends position GCC asset managers for significant growth in the coming years. We forecast that the industry will continue to grow above the global average, reaching nearly $500 billion of onshore assets under management by 2026, up from $400 billion at the end of 2022,” the report explained.
To combat the industry challenges and take advantage of the prevailing tailwinds, the report said that the asset managers must create a winning strategy driven by six key actions. They include honing the performance track record, creating segment-specific operating models and value propositions, building effective sales functions, revamping the product range, exploit digital tools and considering non-organic growth opportunities.
The need to reconsider investment strategies arises when the global asset management industry confronts challenges in generating alpha and experiences pressures from margin erosion.
Studies of the asset management industry suggest portfolio managers struggle to generate incremental value for investors.
The role of asset managers is now diluted by technology, streamlined access to capital markets, lower transaction costs, and greater investor sophistication. Added to that is the digital disruption from fintech companies, such as those that provide distribution platforms and robo-advisory solutions powered by artificial intelligence (AI). The resulting commoditisation of the asset management business and rising investor preference for passive asset management products have reduced profitability.
“Profitability challenges, in turn, force asset managers to seek out cost reductions, innovative investment products, and scalable business models, including partnerships. In addition, asset managers must invest more in attracting and retaining top portfolio managers and must increasingly compete for talent with tech firms,” the report said.