As IPOs keep scoring, will Gulf investors keep funds closer to home in 2023?

Dubai: Markets and investors the world over are turning jittery, worried that what seems to be a crisis confined to a handful of banks could spread beyond that.

It’s been a punishing week or so, with Silicon Valley Bank, Credit Suisse and First Republic hogging all the concerns. For now.

But, through this period, two new IPOs launched in the UAE and there was a blockbuster listing on ADX for ADNOC Gas. In Saudi Arabia and Oman too, IPOs met with overwhelming responses.

So, the sentiment is whatever be the crisis playing out in the backdrop from global events, the Gulf’s IPO pipeline should continue to flow near-term. But with listing companies and investors taking on board a whole lot of caution.

In an interview, Georgios Leontaris, Chief Investment Officer for Switzerland and EMEA, HSBC Global Private Banking and Wealth, has his say on what’s likely.

The pipeline of IPOs in the Middle East remains busy this year, even after 48 deals were concluded in 2022 raising over $23 billion, a three-fold increase compared to the year before. Issuers are keen on tapping investor demand for prized assets in a region which has maintained strong economic resilience despite headwinds in other parts of the world.

GCC governments view the IPO route as a way of accelerating the transition away from hydrocarbon dependency to fund investments in the non-oil economy, and also attract institutional investments in the region.

Market estimates for IPOs range from around 25-40 this year. The rare opportunity to snap up stakes in familiar quality assets is all but certain to attract funds from MENA investors, with lucrative dividends adding an extra incentive. State-owned entities are counted among cornerstone investors for some of these deals, adding extra comfort to investors about the quality of order books.

Near-term concerns about the persistence of global inflation, the need for central banks to keep rates higher for longer as well as the run-up in equity valuations after the January market rally may indeed encourage some local investors to shift their attention to domestic opportunities.

However, our conversations with clients in the region have centred on the need to build resilient and geographically diverse portfolios. The reopening in China and positive spill-over effects across ASEAN countries suggest that the economic outlook is set to improve further in Asia, warranting an overweight stance in the region especially as earnings expectations remain conservative and equity valuations remain cheap on both historical basis and relative to other regions.

For these reasons, we believe that although IPOs will clearly benefit from demand from regional investors. The latter should continue to look for income and quality opportunities in the bond space, Asian reopening winners and alternative investments.

The 60/40 portfolio experienced one of its worst years on record last year, as a result of stagflationary fears, a faster than expected hiking cycle, and higher equity-bond correlations among other factors. The increase in equity and bond premiums, the peak of inflation, the nearing of the terminal rate should contribute towards a better performance of the 60/40 portfolio this year in our view.

The use of alternatives remains compelling, with hedge funds offering good downside protection during times of market uncertainty and consolidation, whereas private market funds launched during market downturns have historically generated strong IRRs.

With Asia and the Middle East likely to remain more resilient than some developed market economies this year, the need to geographically diversify in both equities and bonds is another reason why we prefer to deviate from the 60/40 reference index.

For instance, within Europe we prefer to overweight exporters who can benefit from the Chinese reopening rather than chase the rally in domestic stocks where the headwinds from inflation and high rates remain unresolved.

The real estate market is particularly sensitive to changes in interest rates – with the surge in mortgage rates, elevated valuations and expectations for an economic slowdown resulting in some cracks appearing in key markets.

Affordability concerns and tighter lending standards are likely to curb demand pressures in the near term. Whereas the expectation of continued rate hikes next quarter coupled with an extended pause before rate cuts in 2024, imply that risks to the listed real estate market remain skewed to the downside in key global markets.

It is worth highlighting that although cap rates have gone up, bond yields have gone up relatively more – meaning that we can still have some price pressure. Ultimately, this will throw up opportunities in real estate for long-term investors. Trophy assets and high quality real estate are always on the radar of Middle East investors, who may also view the still-overvalued US dollar as an opportunity to snap up opportunities in markets where currencies remain cheap over the longer term.

With regards to direct real estate investments, we expect office and retail space to remain challenged in the post-pandemic world, mainly because companies transition towards more flexible work approaches enabling work from home features.

The reduced footfall from lower office occupancy will also add pressures on retail property space that are also feeling the strain of the cost of living crisis hurting retail spending.

An area that should continue to do better on a relative basis is logistic space given the shift towards e-commerce spending and businesses aiming to improve supply chain resilience an even near-shoring facilities to increase resilience against another potential pandemic or geopolitical upheaval.

However, we increasingly shift our relative preference towards infrastructure investments over direct real estate. This is because the overall real estate sector headwinds should not be understated and we recommend to remain patient before adding further exposure at the moment.