By Alicia Buller and Andrew White
Brokerage houses have never been bigger business, but how long is the boom set to last?
Brokerage houses have never been bigger business, but how long is the boom set to last?
Representing a customer base of nearly 40,000 clients from the Middle East, Europe and the US, financial services firm EFG-Hermes UAE was granted a license to conduct brokerage activities from within the DIFC in early 2006.
This region is still a frontier market, still in its infancy. But the DIFX tie-up with NASDAQ shows the ambition and excitement that’s apparent in this market.
What's more, the company also became a member of the Dubai International Financial Exchange (DIFX), and was one of the regional financial institutions to broker the wholesale market alongside fellow bigwigs Barclays Capital, Credit Suisse, Citigroup, Deutsche Bank, HSBC, Morgan Stanley and UBS.
"Our trading volumes are very healthy at the moment and one of the reasons for this is that we service a broad base of clients, MENA-based and international, which is one way in which EFG differs from the global investment houses and some of the domestic houses," says Julian Bruce, the firm's director of institutional equity sales.
He adds that while the majority of sectors are still experiencing high volumes, there has nevertheless been some reluctance from foreign investors when considering GCC investment.
"Currently there's no foreign investment happening in Saudi, plus Kuwait is still waiting for the rubber stamp of the removal of its 55% gains tax and investors have been waiting on the sidelines for legal changes," he says.
Bruce is optimistic about the future of the UAE finance markets, however, pointing out that while Continental European Institutional funds have not traditionally been active in MENA, this is changing.
"India and China have proved to be global powerhouses - largely due to their large populations - but, in these more uncertain times, people are turning to the Middle East for investment because it has the cushion of oil revenues and government reserves. There has been no downward revision of our projections and corporate earnings for this year," he says.
Still, he admits that it has been a rocky couple of months: "Before talk of the ‘US recession' the consensus was that developed markets and the emerging markets were de-coupled - we've now seen that this is not true. Because the macroeconomic picture for the UAE is good, they thought we wouldn't be affected - however, a lot of people did sell.
Bruce predicts that there is going to be a lull in the market - and this slower period will stem from the fact that some local investors have noticeably started to park money in real estate, as protection against declining equity values. But, in his opinion, this is not a reason to panic. He insists the long-term outlook for the region is remarkably rosy, considering the turmoil evident in the world markets.
"Figures from Ernst and Young predict that there will be US$1.5 trillion dollars of personal wealth in the GCC by the end of 2008. So it's not a surprise that the international banks are introducing brokering services - it makes sense to be able to execute trade in the local market as this is what their clients want," he says.
"This region will see more M&A advisory activity, bond issuing, more IPOs and so investment banking in the region will become lucrative.
The reasons that international brokerages will continue setting up in the UAE are multitude, claims Bruce. The UAE is a central hub between Asia and Europe markets. What's more, brokerage is a natural follower of investment banking and private wealth services - and a number of international banks are already working on these services in the region.
But will there be enough volume to go around the UAE's 110+ broker community?
"The average daily DFM turnover in the last six months was US$700m in Dubai, and US$345m a day in Abu Dhabi. That's nearly US$1bn a day," says Bruce. "Volumes and turnover are at a sufficient level to be able to support a reasonably sized brokerage community.
However, he warns that local brokers will find it more difficult with the ensuing competition and they will be forced to broaden their services, for example, by providing more in-depth research into "frontier" markets.
Bruce adds competition is always a good thing for the region, because it sparks regulations and the raising of standards. And particularly with the global credit risks that are in the market, the UAE needs to be stricter than ever in regulating its broker community.
"If a broker doesn't have enough capital, it could have serious consequences for the client," he warns. "This region is still a frontier market, still in its infancy. But the DIFX tie-up with NASDAQ shows the ambition and excitement that's apparent in this market.
Bruce recommends the ‘introduction of market makers' and the removal of administrative obstacles to help smooth out the brokerage industry, but concedes "these things will take time to perfect, there is more to be done but the current level of regulation is acceptable.
EFG-Hermes currently has 18% of the market in Egypt, 10% in Dubai and 12% in Abu Dhabi. Established in 1984, the firm went public with a US$50m GDR offering in July 1998, and now has a market capitalisation in excess of US$2.5bn.
The local bank
Emirates Islamic Financial Brokerage
Emirates Islamic Bank created its first brokerage facility in March 2007 - the aptly named Emirates Islamic Financial Brokerage (EIFB).
The new division was set up to enable customers to trade on the DFM and ADSM in concordance with Sharia rules and regulations - offering brokerage and consultancy services, e-trading and dedicated brokers for high-net worth relationships.
And it's been quite a ride - especially in the last month - according to the firm's general manager, Mohammed Al Awadi. While business was brisk last year, he's circumspect about developments in the UAE financial market after it experienced volatility earlier this month.
It's not just about the UAE market - it's about the global market. Each day we are looking at how the markets close, in the East and the US and Europe, then in our neighbouring countries," he says. "We had a sharp downturn at the end of January, but I'm expecting an upturn by the end of the year. Until then, however, who knows how Q1 and Q2 will turn out? Will we see more of a downturn, or will things stay as they are?
And all this, of course, affects Al Awadi's own fortunes. If the market continues as it is, he says, clients will invest in real estate and equities - good for brokerages - but if there is a recession then people will invest in cash deposits or bonds to err on the side of caution.
Since we’ve started, we have grown gradually and have gained market share. Our strategy is to move slowly.
If the global market dips it will affect everyone, our market is an open market - so there is no way we can ignore what is happening outside," he explains.
Al Awadi is at pains to add that, while Q1 2007 has been a rocky chapter, he views the UAE brokerage market as healthy overall. "Since we've started, we have grown gradually and have gained market share," he says, "our strategy is to move slowly.
In keeping with this long-term view, Al Awadi says he welcomes the entrance of international brokers to the local scene and hopes that their arrival will help to bolster standards in the market.
"It is a good thing to have international players in our market. HSBC already has a big presence in the region, the brokerage is just an additional service," he says.
"While it will help to raise standards in the market, the government must make sure that it is able to fully regulate international firms. It is much more difficult to regulate outside brokerages.
The general manager points out that it is difficult to predict the future of UAE brokerages in uncertain times, insisting that most consolidation deals will remain on hold for the moment as firms watch how the market pans out.
"We need to see how the global market will affect our companies in the first two quarters; it will be another one to two months until we know," he explains.
However, one area that gets Al Awadi's full vote of confidence is e-brokering. EIFB simultaneously launched its online trading capability for investors along with its traditional services, and it has been a great success.
"Between 20 and 30% of our business is done through e-trading, and I expect that to grow," he says.
The new players
HSBC Middle East Securities
HSBC became the first international bank to establish brokerage services in the UAE in September 2007. The creation of its Middle East Securities Division marked the first time that international institutional investors were able to access to the UAE stock markets.
"There is a common theme where the region is increasingly valuable and important to people," says Neil Foster, chairman of HSBC Middle East Securities. "This development is hugely significant, since it gives our institutional clients direct access via HSBC to the very positive investment story of the region, as well as giving investors in the UAE and the region a significant new channel to invest in these markets.
In further testament to maturation of the market, this news came in the same week that 11 brokerage firms were suspended by the Emirates Securities and Commodities Authority (ESCA) for failing to comply with new capital guidelines.
The 11 suspended firms had failed to increase their capital from US$2.72m to US$8.16m and bank guarantees from US$2.72m to US$5.44m by September 30, as ESCA stipulated at the beginning of 2007. A shake-up of the market could not have come at a more pertinent time.
Tim Harrison, head of corporate communications at HSBC Global Banking and Markets, tells Arabian Business, "HSBC is first to make this move and I doubt it'll be the last.
HSBC Middle East Securities, which owns 49% of the company, is initially offering services to international institutions, before expanding to offer trading to retail investors. With assets of over US$1.5 trillion, the bank is one of the world's largest financial services institutions.
The bank will market Middle East investment opportunities to institutional investors and pension funds in New York, London and Japan. "In September 2007 we created the corporate entity but we will begin by trading on behalf of institutions in the next few weeks," confirms Harrison.
He adds that there is no reason for smaller brokers to fear the lack of business. "We will broker our own transactions and will no longer be working with our partners in the DFM and ASDM. However, I still think there will be an increase in institutional investments from Western interests, so brokers will not be affected by less volumes overall. More international money managers and fund managers will enter the region in 2008," he predicts.
The bank has confirmed it is exploring opportunities to offer brokerage services in the Saudi Arabian and Egyptian markets.
HSBC is already the largest and most widely represented international bank in the region, with 30 branches throughout the United Arab Emirates and the GCC. Serving over 110 million customers worldwide, the group has 9,700 offices in 77 countries and territories.
Ernst & Young
"It seems that HSBC has found it lucrative to spin off its brokerage business, run it separately from the bank, and really focus on it," Omar Bitar, Managing Partner, Business Advisory Solutions Middle East, Ernst & Young, tells Arabian Business. "That just tells you that HSBC believes there is good business going forward in this area."
Advising clients across the region, the Middle East practice of Ernst & Young has operated in the region since 1923 and is a full member of Ernst & Young Global. Bitar and his team are keeping a close eye on event, though remain unconvinced that the HSBC move will spark a flurry of similar moves.
"There are a lot of brokerage houses in the UAE, and banks may see that this is something they need to be involved in going forward. However, I'm just not sure that banks are going to be running behind HSBC in doing this," he explains.
The UAE is certainly ahead of the rest because of its exposure to a lot of the international companies that are arriving in the country.
There might be some once they decide they want to be in that business, or make sure HSBC's not ahead of them in that business, but there are plenty of brokerage houses in the UAE already, and I think there is enough to go around.
"The competition is heavy, there are probably too many players, and that's probably why some of the banks have not decided until now to go into the space," Bitar adds. "I think HSBC is strategically positioning itself, but I don't think a stream of others will come through in its wake. Some other banks will follow because perhaps they have not been alert to this before, but I don't think it represents an ‘awakening' to a lucrative new venture.
Bitar nevertheless believes that the GCC is an increasingly attractive prospect for brokerages eyeing a slice of Middle East money.
"The larger banks may not be interested, but a lot of the larger global brokerage houses have some sort of a presence and are eyeing up the Gulf more than before," he insists. "Saudi Arabia is particularly tempting - everybody wants to come to Saudi now. A lot of the firms that have initially set up in the UAE, even they have a view to doing at least 50% of their business in Saudi.
He argues that the increased competition among brokerage houses in the region can only be beneficial to the long-term health of the industry.
"New entrants will raise the standard and this is needed, as the markets in the region continue to raise standards as they grow," Bitar says. "The UAE is certainly ahead of the rest because of its exposure to a lot of the international companies that are arriving in the country, but all the countries are going through a development stage and standards are getting higher and higher.
"Just recently the UAE adopted licensing for brokerages and brokers, and that's a sign that standards are getting higher," he adds. "This is going to be brought in by regulators and by international players who have higher standards, so brokers will have to be licensed, and pass through similar exams and qualifications to those they do in the US.
US firm E*Trade Financial is offering local investors an online route out of the Middle East. From its Dubai hub, the company operates as an online discount stock brokerage, offering self-directed investors the prime opportunity to invest on the US stock exchange.
"We are the only online brokerage that has set up in the Middle East, and the main advantage is that people can get direct access to the US markets, so there is no such thing as a middle man where orders might be queued or delayed," Salim Sebbata, Vice President Middle East, E*Trade Financial, tells Arabian Business.
"Why should people in the Gulf go for the US? Because it's difficult to leave aside the largest capital market in the world," he continues. "Secondly, you have very little currency fluctuation depending on which country you look at so it's natural for people to have US dollars as kind of a ‘home currency' for people to trade.
"Another advantage of the US market is that not all sectors move in one direction - where you look at some smaller markets, you see the index moves by 5% and everything else follows the index," he adds. "In the US, however, people can play sectors like biotechnology against semiconductors, so you get pretty interesting swings inside industry groups.
"The wealth of access that you get through an online trading platform such as E*Trade is pretty big.
Sebbata points to Saudi Arabia's 600,000 online traders as strong evidence that the region has immense potential as an online trading hub. Despite the region's recent connectivity issues, more and more people in the Middle East are doing business online, and E*Trade's platform has proved popular with investors.
"If you look at the US markets you have pockets of active traders and hyperactive traders and day traders, but then also you have investors coming in once a month with their savings and buying some stocks," he notes. "We have kind of the same behaviour in the UAE - at least that's what we see at E*Trade."
Technology will be the key to the future of the region's brokerage houses, according to Sebbata.
The company is concentrating its efforts on a range of innovations, although the field with the most potential would appear to be wireless trading via mobile phones and other handheld devices.
"Wireless is very big in the Middle East, a lot more so than sitting at a desk, so we are looking at it and doing some pilots in the US - you can expect that to come to the region," he reveals. "However, the big project is obviously launching at some point in Saudi and Kuwait, and although you will see us offering wireless technology, it's not on the short-term agenda.
"If you look at the more mature markets like the US, people use a financial advisor for one part of their wealth and then trade online with another bit. Then there are people that do everything online because they are not ready to pay for an advisor," he continues.
"We just try to empower people as much as possible to make the right decisions at a reasonable pricing point, to get good value.
"It's tough to talk away the power of the web, so for us it's the future. Online trading and investing is our business model.