“The Need for Diversification of Kuwait’s Economy is Huge,” Says the Best Investment Fund in the GCC

Interview with Faisal Hasan, Chief Business Development Officer & Head of Investment Research Department at KAMCO

What is your evaluation of the Kuwait economy? Where is it heading and what is your forecast for growth in 2017?

The economy here is highly dependent on oil, oil production, and oil prices, and it has a high correlation with the energy markets. We expect the Kuwait economy to grow between 2.5 to 3 percent, this year. But, it must be examined in the overall international context. The world economy is expected to grow at around 3 to 4 percent. We are now seeing a new “normal,” where economic growth will be not as high as it was in the last ten years. Overall, we feel that the non-oil economic growth is going to outperform the oil economic growth. OPEC has implemented production cuts in order to stabilize oil prices, and Kuwait will be adhering to those cuts. That will have an effect on the real GDP growth because Kuwait is such a highly energy dependent economy. It all depends on how the oil markets behave. We expect oil prices to be in the range of 50 to 60 dollars a barrel, which is good when considering that the breakeven price of Kuwait is among the lowest in the GCC region. The budgetary support that the oil prices can give provides a cushion to the economy.

Reports available online project the non-oil GDP growth to be between 3 to 4 percent. What will affect this non-oil GDP growth in Kuwait, specifically?

It largely depends on the government’s investments in the non-oil sector and the kind of platform the government is creating for the non-oil sector to perform. Both the GDP composition and the exports composition of Kuwait are dominated by energy. There is a huge need to diversify the economy, because we have seen that the oil prices can go lower and we might have to cut production. The non-oil sector needs to be strengthened. Also, due to the demographic profile of Kuwait, we need to create jobs. There is a huge youth population. Fifty percent of Kuwaitis are under the age of twenty-five. These young men and women will be ready to come into the work force in the next five to ten years, and the government must support the private, non-oil sector in order to create jobs for them. The most important thing for the non-oil economy is small and medium enterprises, whether it is financial services, telecom services, or industry. There has been a push on the part of the government to grow the SME sector. Across the world, we have seen in both developing and emerging markets that SMEs are the biggest job creators.

The non-oil sector needs to be strengthened. Also, due to the demographic profile of Kuwait, we need to create jobs.

Is this enough or should the government do more? What sectors should the government focus on in terms of diversification?

It is a very good start, but when you are dominated by energy, many sectors related to energy, such as petrochemicals or downstream sectors, will still feed into the oil sector. There is much that can be done in service sectors and industrials. In the GCC region and Kuwait, the major raw material is energy and it can be acquired at a very low price, which can make those sectors very competitive. Through the relationship with the GCC, Kuwait companies can have access to the GCC region and a bigger MENA region. The non-oil enterprise can expand much faster because they have access to Saudi Arabia, UAE, Egypt and other bigger economies, and they can achieve a critical mass very quickly. But again, as a job creator, small and medium enterprises are a very good step, and the government is active in this goal. The non-oil sectors, such as services sectors or financial services, are much more human intensive, rather than capital intensive. Technology is a potential area as well, and we have seen success stories in the e-commerce platform from Kuwait.

KAMCO is well established in the market in Kuwait. There is a discussion about Kuwait reestablishing itself as a financial center in the region. Do you think this vision is feasible?

It is definitely feasible, because Kuwaiti companies, asset management companies, and investment companies have a rich history of experience in managing money across the world and across asset classes. They have seen the highs and lows and different cycles of the stock market. We now have the Capital Markets Authority and Boursa Kuwait. Their intention is to bring new products that will add value to the investors, whether it is our hedging products or our investing products. We are seeing new products being successfully developed by asset management companies, investment companies, and the investment sector as a whole. We are seeing much more value added products, both in the primary and secondary markets. The bond issuances in Kuwait is also very good. IPOs have not been quite as good, however. The Kuwait government will now be bringing the sovereign bond issue, which will add depth and value to the secondary bond market because we will have a yield curve on which other corporates and financials can price their bonds. It will also add depth to the overall capital markets activity. There are many steps being taken in the right direction. We now have to see how these steps are executed and how fast they are executed, because within the region and across the world, the financial centers have risen up. Many of them are very successful. Kuwait has the right ingredients to become a good commercial and financial center.

How has KAMCO performed in the last two years? Where do you stand in the market currently and where are you heading?

From KAMCO’s perspective, we are a leader in the investment banking space. We have a huge market share in debt capital markets, which are very active in Kuwait. Last year, we managed bond issuances of the major banks in Kuwait. We are very active in equity markets in the MENA region. In terms of asset management, last year, all our funds were top-ranked among the top three categories. Our real estate fund and our fixed income fund have performed very well and we have been able to attract new money as clients put their faith in us. Last year was quite good for KAMCO, even though the markets did not perform that well and were quite slow. In January 2017, Kuwait was the top growth market in the world in terms of index growth. We are seeing the Kuwait market catching up with investors and the volume and value traded on the Kuwait Stock Exchange. We expect that the earnings growth is going to be the next trigger when companies declare their earnings and dividends. The short to medium term looks very good for the Kuwait market.

You recently launched a new global investment fund called the Islamic Kuwait Fund. How has this new fund been faring?

This is our new international Shariah compliant fund. It is CMA licensed and we have received very good feedback from our clients so far. We have partnered with an investment service provider, Wellington Management International, which is one of the top twenty biggest asset managers in the world. Wellington’s strategy has given a return of around 12 percent over the last six years on an annualized basis. It follows the S&P BMI Shariah Index, which is predominantly invested in IT, pharmaceutical, industrial, and consumer discretionary sectors, which are areas we feel will perform. This is a good diversification tool for the investors because in the GCC, there is a tendency to have a home bias where people invest in local markets and local products. We are trying to fill the gap and bring an international product to them so that they can diversify their investment portfolio, and we expect a very good reaction from the market.

What is your presence regionally and further?

We have always had clients from both within the region and internationally. We are now augmenting our physical presence, first regionally and then internationally. We opened an office last year in DIFC, which we will be using as a hub for asset gathering and deal origination across the GCC region. This will help us in establishing a footprint and in expanding into other GCC countries. We are ramping up our staff in DIFC in order to add value and bring institutional investors to KAMCO.

What is your strategy to attract more investments from Europe?

When examining yields in Europe or the US, 80 percent of the fixed income instruments are giving negative yields. The GCC is a much more stable region. The biggest draw is that Kuwait is not pegged to the dollar, as some other GCC countries’ currencies are. With Kuwait, there is minimal currency risk, which is the biggest risk that European or international investors fear when they invest in emerging markets. Also, the yields that European investors are getting in the region, whether they are on fixed income instruments or real estate, are very good compared to what they are getting in their home market. We are receiving numerous inquiries and interest in the products in the GCC which are giving good yields, in the range of 5 to 7 percent, compared to the fixed income instruments that are currently seen in Europe. That is attracting many institutional investors, family officers, and pension funds towards the region. This region has always seen capital being invested from the region to the international markets. Our strategy is to provide a good product with a good yield so the international money will be invested back into the region and still give out very good returns.

Does KAMCO have to be in Dubai in order to address the GCC market? Is this contradictory to being based in Kuwait?

DIFC will perfectly complement our Kuwait offices and our strategy for regional expansion. Sometimes you must be closer to those institutions. For example, London and Ireland or Luxembourg and Zurich are geographically very close, but each of them has a niche area on its own, a niche institution, and niche investors to cater to. In Kuwait, we will be doing more product innovation and product generation, while DIFC will be for deal origination and asset gathering. The opening of an office in DIFC or in any of the GCC countries will not reduce the position of Kuwait. It will help us to utilize all the benefits that we have from the other financial centers and other economies back into Kuwait.

Kuwait is now the leading growing market in the world. What are the reasons for this?  

Last year, we did not perform as well as other GCC markets, such as Saudi Arabia, which showed very high numbers during the second half of the year. But, Kuwait is catching up. Kuwait is among the biggest frontier market of the region, now that UAE and Qatar have gained emerging market status. Pakistan is also on its way to becoming an emerging market. The funds that look at frontier markets are now seeing investments in Kuwait. Companies in Kuwait are now very attractively priced. Between January and April, companies declare their dividends and profitability. We have seen some good initial numbers and profitability coming from the banks. We feel that investors are now looking at taking the plunge in the market; whereas earlier, it was a “wait and see” mindset. They are also looking at the international markets. US markets excelled after the presidential uncertainty ended. The money that was sitting on the sidelines is now coming into the risky assets. The growth in the market is accompanied by the high value traded. Investors are now putting serious money into the market.

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