Loic Lebrun, Head of Prime Finance EMEA at HSBC, explains the importance of MENA within the emerging markets space, and looks at how the changes in market infrastructure combined with the work being done by HSBC and other industry players, are supporting the development of the securities finance markets in the region.
Any analysis of MENA is bound to start by acknowledging that the region has come a long way in a short amount of time. Just two years ago, it accounted for less than 1% of the global MSCI emerging market index (1), but a myriad of inclusions (Qatar, UAE and recently Saudi Arabia) has increased this representation to approximately 5.5% (2) now; with this portion set to grow even further with the addition of other inclusions, such as Kuwait starting 2020.
The MENA region has seen a consistent growth in the past few years where it achieved an average of 3% in the past five years in comparison to roughly 2% for developed markets. MENA countries have implemented several reforms to diversify their economies, as well as attract more foreign investments into their markets. A notable example is Saudi Arabia, which is undergoing a big privatisation programme under the umbrella of the Vision 2030. Furthermore, post-trade reforms are also underway in Kuwait, the UAE, Oman, Qatar, Bahrain, Egypt and as of recently, Saudi Arabia, which has generated the most client interest, on account of its deep liquidity pool and market capitalisation size.
In the long term, MENA is expected to represent up to 8% of MSCI EM index. This region is one of the most exciting stories in the emerging markets space; not only due to the significant growth it is set to witness at the macro level and the unutilised level of equities inventory (currently estimated at more than $100 billion (3), but also because of the opportunities to build an efficient financial ecosystem that would allow the region to become more accessible for international investors.
The evolving market infrastructure landscape in MENA
While the market has paid closer attention to the developments in Saudi Arabia, Qatar, the UAE, Kuwait, and Egypt specifically, there is a commitment to improve market infrastructure across the entire region. Although the regional economies are competing with each other, the exchanges and regulators are highly motivated to raise capital and boost investors’ interest in their respective local markets.
Before the inclusion of the MENA markets in the global emerging markets indices, local investors accounted for more than 90% of ownership and relatively few fund managers specialising in emerging markets had an interest in the region. The region is now experiencing the classic phenomenon of passive asset managers having to invest in the region in order to track their benchmark; and subsequently now accounting for the highest percentage of turnover.
The arrival of major index asset managers in any market brings an increase of intra-day liquidity, a demand in market making and a reduction of spreads; which effectively creates an environment where there is higher turnover, and a higher demand for leverage by market makers and asset managers. Trading and execution are just one piece of the equities ecosystem; the latter also includes the ability to refinance, lend inventory and to short. Whilst the last three components are arguably still missing overall in the MENA landscape; the advent of international players in the local markets, jointly with the reforms implemented by local regulators will in time alleviate this issue.
HSBC - the partner of choice in the MENA region
Whilst London is undeniably one of the world’s financial epicentres, MENA should also be considered through an on-the-ground lens. Local presence, expertise and proximity are crucial. At HSBC, we have been present in the region for more than six decades; with a significant presence in Egypt, UAE and Saudi Arabia.
We are using this proximity to work with regional regulators in their efforts to open up the local markets and facilitate the first repo and stock lending transactions. We have already done this in the fixed income space; where securities finance transactions are already taking place and where HSBC is a market leader.
With MENA’s share of the emerging markets universe growing steadily it is very likely that the market will develop relatively quickly. Having an international broker, such as HSBC, facilitating clients’ front-to-back access, is critical for institutional investors willing to gain exposure to the region. HSBC services extensively cover the clients’ journey of accessing the region: starting from algorithmic execution, getting synthetic access or index exposure, to applying for the QFII status, to being the main custodian, and to facilitating contacts with local regulators.
Sources: 1) MSCI; 2) MSCI; 3) HSBC.