Moody's: High Oil Prices to Boost GCC Funds' AUM

Higher oil prices are slated to boost the GCC funds’ assets under management (AUM) and attract higher fund inflows, according to Moody’s. This will support fee revenues, although the sector also faces headwinds from more volatile markets, higher inflation and rising interest rates, said Moody's 2022 survey of chief investment officers (CIOs) from eight leading GCC fund firms. The key findings were disclosed at a media roundtable.

Respondents expect continued strong demand for Shariah-compliant investments, but foresee more moderate growth in investments that meet environmental social and governance (ESG) criteria. Respondents are bullish regarding AUM levels despite the global market downturn because high oil prices will support the value of their portfolios, which consist mainly of regional assets, while also attracting net new money.

This will help counteract the adverse impact of volatile markets, higher inflation and rising rates, it said. Highlighting that the GCC countries are highly dependent on oil exports, it said strong oil prices can boost their economic growth and support public spending.

For Saudi Arabia, the GCC’s largest economy, accounting for the majority of the region's assets under management, the rating agency forecasts 7.2% real GDP growth in 2022, up significantly from 3.3% in 2021. "This substantial acceleration reflects increased oil production as well as terms-of trade benefits to the economy from high oil prices and a strong US dollar. This will in turn help spur non-oil sector activity," it said.

Finding that market volatility, inflation and rates are key concerns; Moody's said capital market volatility is GCC asset managers' biggest worry over the next 12 months, with a cumulative 88% of respondents placing it among their top three concerns. The GCC asset managers who invest largely in the regional assets have been less exposed to the market volatility experienced by global peers, as high oil prices have buffered domestic equity markets.

The GCC asset managers’ second greatest worry is the increasing inflation, cited by a cumulative 75% of respondents as a top three concern. Rising inflation can adversely affect asset valuations, exacerbating market volatility, and increasing outflows. It can also push up asset managers’ input costs, particularly compensation expenses. However, inflation in the GCC countries has increased more modestly than elsewhere, and we expect it to remain below the average for both emerging markets and advanced economies.

Observing that appetite for Islamic assets remains strong; Moody's said as much as 63% of survey respondents expect further growth in demand for Islamic investment assets, with the remainder foreseeing broadly stable demand. The same proportion expects demand for Islamic products to outpace demand for conventional investments.