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Middle East-Asia corridor – a new conduit for global capital

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Investors in the Middle East and Asia are finding opportunities in each other’s stock markets due to strong economic growth, improved market infrastructure, and robust IPO pipelines.

One of the most important developments in global financial markets is the rise of portfolio flows between emerging markets. This trend is most apparent in the growing links between the fast-growing economies in the Middle East and Asia, as investors in both regions are creating an investment corridor that will only grow in significance over the coming years.

“From the perspective of the geographies where some of the world’s most significant structural economic shifts have occurred over the past few decades – and are likely to occur again over the decades ahead – now is the time to invest for the transition to come,” said Stephen Moss, Regional CEO for HSBC in MENAT, speaking at HSBC’s China-MENAT Summit in August.

The Middle East and Asia share world-beating rates of economic growth. Gulf Cooperation Council (GCC) economies grew by 7.3% in 20221, buoyed by strong energy prices; while in Asia, India led the pack with a 7.2% expansion of GDP in the 2022 to 2023 financial year2, as the region enjoyed a post-pandemic recovery.

Investing in structural change

Over the medium to long term, it is structural change driven by economic diversification that will deliver continued growth.

Saudi Arabia’s Vision 2030 exemplifies the region’s transformative ambitions, with plans for a thriving economy that includes leveraging the country’s location, attracting talent, and increasing global investment. There are similar plans in the United Arab Emirates: the “We the UAE 2031” plan aims to double the size of the national economy, while the Dubai “D33” plan sets the ambition to be a number one world city in logistics, manufacturing, finance and tourism – with enhanced trade with Asia a key policy goal.

In Asia, the next generation of growth drivers are emerging. Take electric vehicles for example, a rapidly growing sector that combines sustainability and innovation. The EV supply chain is currently being built across the region, creating attractive openings for investment in miners, battery makers, and car companies. Other major themes include renewable energy, ecommerce, and FinTech.

In financial markets, all these secular economic trends have resulted in robust pipelines for IPO deals. In 2022, there were 48 listings in the GCC, up from 20 in the previous year, raising $23.4 billion3. These deals were popular among Asian investors, who were able to gain exposure to companies in a diverse range of sectors – including healthcare, real estate, and capital goods. Early in 2023, the flow of GCC IPOs remained strong4.

At the other end of the investment corridor, Asia-Pacific leads the world’s equity capital markets. In the first half of 2023, the region had the highest volume and value of IPOs in the world, of which half were from mainland China5. Middle Eastern investors are active participants in many of the region’s IPOs, as they look to gain stakes in companies involved in technology and sustainability.

Countries in the Middle East and Asia are looking at each other more strategically. Financially, they are exploring each other’s market for better returns on their investments.

Samir Assaf | Non-Executive Chairman of HSBC Bank Middle East Holdings BV

Growing investor interest

A broad range of institutions take part in the investment corridor that links the Middle East and Asia, with mutual funds, private banks, and sovereign wealth funds are all active participants. Hedge funds are another increasingly important category of investors – especially in the Middle East, as Dubai becomes a global hub for alternative investments.

"Since the pandemic, a growing number of hedge fund managers have looked to expand and relocate some of their operations to Dubai in order to tap into the region's high-net-worth retail and institutional wealth, for lifestyle purposes, and to leverage Dubai's accommodating regulatory environment and infrastructure," said Camille Asmar – Managing Director, Head of Equity Sales, Europe & Emerging Markets, HSBC.

Investors on both sides of the investment corridor are able to take advantage of developments that have made it easier for international investors to invest in each region. Index inclusion for example, has made China and the GCC significant constituents in the FTSE Emerging Index, with weightings of 32.7% and 8.6% respectively6. Increased ease of access means that investors in the Middle East and Asia are discovering more about each other’s markets.

“Investors in Saudi Arabia are particularly impressed by the breadth and depth of China’s onshore markets, while Chinese investors are taking note of the rapid progress that the Saudi Exchange has made in recent years,” said Irene Ho, CEO, HSBC, Qianhai.

Improved cross-regional connectivity

In terms of market reforms, Saudi Arabia has loosened foreign ownership limits, introduced a local derivatives market in 2020, and upgraded its post-trade infrastructure. These measures, in combination with a highly active IPO market, have made the Saudi Exchange the ninth largest stock market in the world7.

In recent years, the Saudi capital market has experienced exceptional growth becoming one of the most dynamic and attractive investment destinations for issuers and investors globally.

Eng. Khalid Al Hussan | Chairman, Saudi Exchange

Access to China’s onshore market is easier than ever before, due to the continually evolving Stock Connect programme, which provides a channel to the A-share market via Hong Kong. In 2022, exchange traded funds (ETFs) were added to both the Northbound and Southbound routes of Stock Connect – a development that is particularly relevant due to the growing demand, in both the Middle East and Asia, for the broad exposure that ETFs provide to each region.

Looking to the future, corporates have the potential to realise capital raising opportunities along the investment corridor via dual listings on exchanges in other regions. The race is on to become the first Asian company to complete a dual listing in Saudi Arabia, while dual primary listings in Hong Kong can be eligible for Southbound trading on Stock Connect, providing access to onshore China’s deep liquidity.

Hong Kong’s long-established role in connecting Asia’s financial markets to the rest of the world is evident as the city is quickly formalising links with the Middle East to facilitate investment flows – the result of a number of high-profile delegations between the city and the Middle’s East financial centres. In February for example, Hong Kong Exchanges and Clearing (HKEX) announced the signing of a memorandum of understanding (MOU) with Saudi Tadawul Group to explore future cooperation8.

HSBC: An end-to-end partner

It is important to find an experienced banking partner that provides an end-to-end service across the entire corridor. HSBC does just this, with its award-winning equities franchise in both regions – one that is trusted by the largest and the most influential investors.

With more than a century of experience in both the Middle East and Asia, HSBC is in a uniquely strong position to turn cross-regional investment strategies into reality, as markets in the Middle East liberalise and China further develops the Belt and Road Initiative.

“Today we are assisting investment management companies understand the requirements for setting up in the UAE and providing thought leadership, investor access and roadshows together with HSBC’s platform solutions to help investors formulate their investment decisions. All of this is possible due to our market-leading presence in both regions.” said Terry Minkey, Managing Director, Head of Securities Financing Origination Sales, Asia Pacific, HSBC.

Operating in eight markets across the Middle East, North Africa and Turkiye region (MENAT), we are well-positioned to support investors expand in the region through our deep knowledge and as one of the most active secondary trading houses on the Dubai Financial Market and the Abu Dhabi Securities Exchange.

In Asia, we have an extensive network and strong know-how through our presence in 19 markets. This includes a one-stop service model for all China-related equity investments, with access to the onshore A-share market available via Stock Connect, the Qualified Foreign Investor programme, and synthetic channels.

Trade between emerging Asia and GCC is growing strongly and is set to reach over USD500billion by 2030*. Institutional flow between these regions is also strengthening as investors seek to diversify and harness the rich opportunities that ‘opening up’ creates. Our longstanding presence and expertise in both regions mean we are well placed to help institutions and corporates unlock the enormous potential as it unfolds.

Monish Tahilramani | Head of Markets and Securities Services, Asia Pacific, HSBC

Rediscovering China opportunities for equity investors

After an extended period of enhancement to the access channels into China’s onshore stock market, international investors now have an even greater range of options to choose from when deciding how to invest in A-shares.

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