Euromoney Middle East Research Poll

Euromoney, December 2014

This year’s Best Middle East Research Houses poll is dominated entirely by two institutions. They are bonded not so much by what they have in common, as what they are not: neither is an international research house.

Instead, Saudi Arabia’s NCB Capital and Egypt’s EFG Hermes monopolize our survey, taking all 14 categories between them. And, while it’s interesting to look at why that might be the case, it is equally intriguing to ask whether international banks and brokerages are showing a remarkable lack of foresight in having failed to build research arms that generate similar levels of local enthusiasm.

How so? Well, as the accompanying article examines in some detail, change is coming to Saudi Arabia at a pace that has taken long-jaded observers completely by surprise. Suddenly, after decades of exclusion and opacity and difficulty, the biggest capital market in the region by far is about to open its doors to international investment. There is plenty more in that article about the how and the when and the why, but what’s interesting in the context of a research poll is the significant opportunity Saudi’s opening ought to represent to banks with established teams of top Saudi (and broader Middle East) analysts.

Consider this: even with a ceiling of 10% of the country’s market capitalization being open to foreign investors, that allows for $55 billion of foreign investment inflows into Saudi Arabian equities – something that, once Saudi finds its way into key MSCI and other indices a few years from now, is likely to be taken up reasonably quickly. Some of that money will be passive, but particularly in the early days it will be seeking the right stocks to invest in, and the right strategies to deploy. Yes, international fund managers have been able to access Saudi through synthetic means for some years and are actively doing so, but allowing direct exposure is going to make Saudi attractive for a lot more institutions than was previously the case. Each of them, surely, is going to see the value in good broker research.

But where will they get it? Judging by our survey, from the locals. NCB’s extraordinary performance in this year’s survey clearly demonstrates that it is Saudi Arabia that most captivates the attention of the stock-buyers in the region. Our accompanying best-managed companies survey supports the point: the majority of awarded companies are Saudi too. So why aren’t the plentifully-resourced global research powerhouses storming forward in these awards? How have they let their research capability fade in the region at exactly the moment that it is becoming more important in global capital markets terms?

Certainly, the regional houses haven’t missed the opportunity. And it’s not just NCB and EFG Hermes. To spend time listening to National Bank of Abu Dhabi’s expansion plans across all areas of debt and equity securities in the region is to leave the meeting exhausted. As Euromoney discussed in detail in September, it’s no longer enough to think of the Middle East as a region full of heavy-set domestic banks with modest outposts in their neighbours; these days regional leaders from Qatar National Bank to Bahrain’s Al Ahli, Lebanon’s Audi and Blom to Jordan’s Arab Bank, from National Bank of Kuwait to NBAD and Emirates NBD, source significant parts of their income (a very clear majority of it, in Al Ahli and Arab Bank’s case) from outside their home market, but from within the region. It’s early days, but this speaks of a future within which Middle Eastern capital markets ought to be seen as more of a bloc of capital than a series of fairly meaningless puddles of illiquid and state-heavy bourses. UAE and Qatar ascending to the MSCI Emerging Markets index is an early vanguard; Saudi’s emergence, and perhaps Iran’s in due course (though it will always be a special case to be considered in isolation) are the future.

It’s not so long ago – 2007, if memory serves – that Morgan Stanley issued a research report on the Middle East giving it its heaviest possible endorsement, spelling out a range of attributes that would give these markets an almost peerless future for investors. International brokerages were staffing up back then. But then came the global financial crisis, and along the way a lot of foreign houses lost interest in the region. They kept their sales presence in The Gate, the premises of the Dubai International Financial Centre, sending flown-in teams of sales professionals to queue up at ADIA and the rest of the region’s sovereign funds in order to take their capital back to London and Geneva and New York, but in most cases a commitment to top-ranked local research has dwindled beyond the view-from-30,000-feet stuff. There are exceptions – HSBC, despite cutting a lot of headcount in a wide range of Middle East (particularly Islamic) businesses, continues to produce excellent material – but there’s no question that ground has been ceded to the local houses who not only have a vested interest in covering their own markets, but believe very strongly in their future. It is time for the multinationals to have a rethink.