OBG talks to Gerald Hassell, Chairman and CEO, Bank of New York Mellon

Interview: Gerald Hassell

Is the absence of institutional investors in Gulf bourses a serious impediment to market depth?

GERALD HASSELL: The regional markets remain dominated by retail investors, but inflows from foreign investors have been on an upward curve. Development of the local institutional market would be a critical step in increasing depth. We only need to look at global markets to understand the impact of large sums of managed monies on an exchange. The development of a regional institutional base is being encouraged.

The UAE and Qatar have been promoted from frontier to emerging market status. What impact could this have on their economic development?

HASSELL: Foreign investment inflows of up to $3bn for the UAE and Qatar have been estimated, though the impact would be much more gradual than a sudden “turning on of a tap”. More important, perhaps, is the impact on sentiment for both retail and foreign investors. The upgrade to emerging market status is a huge boost and sends a strong message that the UAE and Qatar have taken on board the requirements laid down by MSCI for inclusion in the index.

We have been seeing increased inflows from foreign investors for some time now. When combined with the rising standards in investor relations and corporate governance, regional dynamic listed companies are now visible across major capital markets.

Given the current liquidity in local markets, the UAE and Qatar both stand to benefit from a substantial injection of capital. The argument for attracting the right type of foreign investor is especially strong now in light of the MSCI upgrade. A diverse institutional investor base will provide the foundation for market stability, which, together with improved investor relations and corporate governance practices, will ensure a positive long-term view. International investors are likely to build their exposure over time but once they invest, it will be for longer periods, providing enhanced stability for the region.

In light of recent market volatility, do you feel that retail investors have a more stable approach, or does sentiment still play too big a role?

HASSELL: Retail investors are slowly returning to the markets. Saudi Arabia has been the one country to maintain strong liquidity levels and is the exception. Whether increasing retail investment is sentiment-driven is perhaps untested at this stage.

Given that Islamic financial services (IFS) institutions emerged strongly from the global economic crisis, what conclusions can be drawn about the future role of IFS in financial markets?

HASSELL: The Islamic financial sector operates in a global environment, and it is, and will continue to be, affected by what happens in global financial markets. However, as a larger number of participants are becoming interested in IFS, the sector will continue to grow and increasing Islamic banks’ liquidity levels will become more significant. If Islamic finance continues to get comfortable with longer-tenor investments, project financing can then certainly benefit from this increasingly available pool of funds.

What effect has the ongoing slowdown in Western economies had on institutional investors’ appetite towards the Middle East and Africa?

HASSELL: Banks, utilities, corporates and sovereigns in the region have shifted from bank financing to capital market financing. By looking to raise funds through markets, institutions are now required to tell their story to potential international investors.

This “due diligence” process is both internal and external. It helps the region to engage with potential investors and brings clarity to its business models. Notwithstanding the geopolitical and macroeconomic implications related to the Middle East and Africa region, an obvious collateral element is that now the whole world knows more about the region and that diversity of realities in the region.