New lines in the sand

The newsflash in the Wall Street Journal yesterday that the Saudi government has decided to rethink its "multi-billion dollar U.S. financial strategy" as well as the possible New York listing for the partial IPO of Saudi Aramco in 2018 is the first public marker of a trend we have observed in private conversations in the Middle East going back to March this year: many senior decision-makers in the Middle East are concerned about the political risk posed by the incoming Trump Administration in the United States, and have begun to make important financial decisions informed by their assessment of that political risk.

Previously, I highlighted this trend in the thinking of regional institutional investors in our LinkedIn contribution titled "President-elect Trump and Emerging Markets Private Capital: Eight “Big Picture” Ramifications for the Industry" published on November 23, 2016. Back in March many institutional investors in the region had just gone underweight on U.S. assets and were looking to inform themselves more deeply about investment opportunities in emerging markets. We can now add the most senior government officials in Saudi Arabia to the group of influential decision-makers in the Middle East who have turned weary of the United States when it comes to their financial interests.

Granted, this particular re-evaluation was triggered by the earlier much-contended passage on September 28, 2016 of the Justice Against Sponsors of Terrorism Act ("JASTA") that allows families of 9/11 victims to sue Saudi Arabia for any role it may have had in the terrorist attacks on that infamous day. Getting sued as a sovereign entity in an American court could expose the sovereign assets to legal judgments if found liable. One can understand the Saudi's reluctance to list their crown jewel, possibly the largest IPO the world has seen, in the same jurisdiction. As much as this development preceded the incoming Trump administration, President-elect Trump has spoken very favorably of the bill, saying before the passage of the bill on September 23, 2016 that "if elected president, I would sign such legislation should it reach my desk". The Saudis can with near-certainty count on Trump not withdrawing JASTA anytime soon. If nothing else, it will give his administration leverage for a "better deal" with the Saudis, an idea central to the new President's modus operandi. The Saudis are of course not amused.

Indeed, the Wall Street Journal cited a person familiar with the Saudi sovereign wealth fund which holds the government's stake in Aramco that "[it] has paused its U.S. investments until [we] can figure out the implications of the bill and the new direction of the White House." I think the direction is pretty clear, but a new "deal" may not be likely to be struck anytime soon. The longer the new U.S. administration can hold out, the more energy-independent it gets, the more leverage it achieves in the overall relationship. Trump has vowed energy independence from "our foes and the oil cartels". Around 31% of all U.S. oil imports are still from OPEC members at this point. But the U.S. shale oil boom has already made it the third largest crude oil producer in the world, and the current oil price gets the shale operators cranking the pumps again at full throttle.

What does this mean for emerging markets (EM) investing? When the Middle Eastern investors start shifting their asset allocation to some degree from U.S. assets into other markets, it will certainly be noticeable in the United States but it won't represent a make-or-break moment for the $18 trillion economy. With Europe exhibiting low growth and the Japanese economy still stalling, emerging markets are poised to be the largest beneficiary of this shift. It will be an important development for EM investing: the emerging markets private capital industry raised $24 billion globally in the first three quarters of this year, down from banner fundraising years in 2015 ($48 billion) and 2014 ($54 billion). Since private markets have outperformed public markets in EM over any conceivable time period, much of this shift in Middle Eastern asset allocations will benefit the EM private capital industry.

As the non-profit global industry association for emerging markets private capital (www.empea.org), serving the interests of both fund managers and institutional investors, EMPEA plans to undertake our second annual "Immersions" journey to the Gulf States in March 2017, taking a diverse delegation of up to ten of our Member fund managers to meet with institutional investors in the region and to comprehensively inform these investors of the current opportunities of investing in private markets in our emerging economies. This facilitated content-rich networking is hugely important for institutional investors trying to identify the right investment strategies, sectors and geographies to invest in. In addition to our convening of local investors at multi-LP sessions for a roundtable discussion and one-on-one meetings -- with a total of thirty institutional investors participating across four Gulf cities last year --, seven leading institutions have anticipated our arrival in March 2017 and, as a reflection of their genuine interest, have already confirmed to host the EMPEA fund manager delegation for headquarter visits at their offices. RSVPs from many other institutional investors are coming in as we write this. We will visit not four, but eight cities in this upcoming trip: Abu Dhabi, Dubai, Kuwait City, Muscat, Riyadh, Dhahran, Manama and Doha.

EMPEA makes it its business to anticipate global capital flows and looks forward to continuing to play a critical role in convening supply and demand of institutional capital in emerging markets. In the process we foster a vibrant and informed emerging markets private capital industry, in order for our Member Firms to realize attractive risk-adjusted investment returns and help drive sustainable growth in emerging markets. It is our mission and it is what we do.

Views and opinions expressed by the author do not necessarily reflect the opinions, viewpoints and official policies of EMPEA and its Members.