Turning tides: a new dawn for capital flows

In the latest episode of the Emerging Market Equities podcast, Nick Robinson speaks with Alex Smith and Peter Dunbar to explore how capital flows are shifting across Asia and the Middle East. Discussing Asia's evolution, momentum in the Middle East and the rise of domestic investors. 

Transcript

Nick: Hello, this is Nick Robinson from Aberdeen and you're listening to the Emerging Market Equity Podcast together with our expert guests we'll dive into the driving forces behind emerging markets and uncover the opportunities that are shaping the future of this exciting region. So the last 20 years has seen huge changes in emerging markets. Some countries, particularly those in Asia, have made huge strides forward in terms of economic development, while some others still lurch from crisis to crisis. We've seen a huge broadening out of company choice as markets become less dominated by those kind of historic, state controlled companies. And that's being driven by real entrepreneurs that are building and listing businesses locally. Whilst this process has been ongoing, huge amounts of wealth that's been created and this wealth creation has also led to another key shift in emerging markets. And that's shifting capital flows and the rise of a domestic emerging market investor, be may governments, companies or individuals. So today I wanted to shift the conversation a bit and think about trends related to the changing investors in emerging markets, how capital flows are shifting and the impact this is having on emerging markets. So I'm delighted to be joined by two colleagues who are extremely well placed to comment on these trends. Firstly, Peter Dunbar, who heads up our business in the UAE. So he's very close to all that Middle Eastern capital. Welcome, Peter. 

Peter: Nick, thank you very much and pleasure to be here. Much appreciate you giving me the opportunity to join. 

Nick: Great. And then also we have Alex Smith as well, who's an equity investment specialist based out of Singapore. So very well versed in all the changes occurring to Asian capital flows. Welcome to you too, Alex. 

Alex: Hi Nick, thank you very much for having me on today. 

Nick: Well, it's a pleasure to have you both on. Perhaps to kick off you could give us a bit of colour on, your experience, both of you as expats. Firstly in the UAE, Peter. 

Peter: Thank you. Nick. So you mentioned a lot of change in emerging markets over the last 20 years and I think I would argue that probably the Middle East has seen more change than anywhere else. As we look back, we had oil price peaking at 140 back in July 2008. And this was a time of kind of, huge growth in the region and then the financial crisis came along and things change very quickly. The Dubai stock market was down by around 72% in 2008. And, you know, it entered into a very challenging period for the region. I myself first moved to the Middle East in 2010, and my recollection of arriving was seeing shells of buildings and apartments everywhere, just abandoned projects and, reports of cars in the thousands being abandoned at Dubai Airport as expats left. And the time many people, many commentators would laugh at people, they'd laugh and say look at these buildings, why did people build these in the desert. And this is, thinking of it as a failed project. And, when we look 15 years on, how much things have changed because these same shells of buildings are now luxury villas, which are going for millions of dollars. And, you know, I've been fortunate enough to be in the region and witness such a huge change. And the growth has really been quite incredible. During my time at Aberdeen, we were actually the first asset manager to set up in the ADGM. This is the free zone in Abu Dhabi. When I first moved there were many free offices and it really felt very quiet. But over time, what's happened is it's just become more and more busy. And, last year the free zone expanded to take on another island in Abu Dhabi. And so, you know, my experience has been one of huge growth and huge opportunity, which I've been fortunate to be part of. 

Nick: Yeah, that is really interesting. The, you know, remember the financial crisis hit the region so hard and it's taken I mean, it took years for investors to get comfortable again with the region after that, given how impactful it was. But certainly that's now happening, from an emerging market perspective. What about you, Alex, how has your experience in Singapore been so far? 

Alex: Yeah, thanks. Well, I'm not such a sort of storied expat as Peter, so I've been out here for three years. I moved from London in 2022, just after they'd sort of got rid of all the kind of Covid restrictions which had been here for a long time. I mean, coming here, I have to say it's pretty seamless, right. It's such an efficient place. English is the first language. And there's a real established community of Brits here. So you know, you can get your things, like, all the kind of comforts of home, like brown sauce and tea, etc. So, it has been a very, very easy place to live. I think, you know, one change, if you think about an important moment in Singapore and Hong Kong as well, was Covid. So a lot of people and expats actually left, after Covid, people just became uncomfortable with the level of restrictions, I think. They're slowly starting to come back. And they're still a very vibrant expat scene, but there's definitely been a marked change in things that people talk about before Covid, to now, which I think is quite which I think is quite interesting. But I have to say it's been a very positive experience and really quite a smooth one overall. 

Nick: That’s great. I'm very relieved that you can still get your brown sauce and tea, that was something we were very worried about when when you moved over. So thank goodness for that. Perhaps if we kick off, you know, thinking about global capital flows, you know, both Asia and the Middle East have been seen historically as sources of capital into the US. But we're seeing some signs that that's beginning to change. Perhaps you could talk us through that. Kicking off with Alex. 

Alex: I think this is really interesting. As you say because traditionally, what was going on for the last sort of ten odd years at least, has been, you know, exporters in Asia have built up surpluses. And largely that's been invested into US assets. And that is across pension funds, governments, retail investors. So it's a very broad base kind of pattern of behavior. So there's different drivers. But you know we've seen this year it shown up in the currency markets. The Taiwan dollars up 8% versus the US dollar this year. So they weaken their currency to make their exports more competitive. Been incredibly successful at this. But why is this change in what we've seen in the US, this policy of deliberately focusing more on real assets, so trying to make, you know, basically making stuff a bigger portion of the economy than the capital markets and also encouraging countries to do things like spending on defence. It's true in Europe. Also true in Asia. And so what does that mean. What it means this flow of capital is going to change. Right. So some of that money that's been invested into the US will come back domestically to improve the defence industry, or some of it will go into the US economy to build factories. You know, I mean, TSMC, is a good example of this, their spending CapEx in the US. And to do that you probably want the dollar weaker as well. That's not an explicit policy. But I think it is it's pretty heavily implied from what they're doing. And I just want to quote Scott Bessent, who is the secretary of the treasury, who kind of puts this idea most neatly. This was him in April 2025 this year, its main streets turned to hire workers, its main streets turn to drive investments, and its main streets turn to revive the American dream. Now. Yeah. What are you saying there. That you want to shrink the size of the capital markets as a portion of the US economy and build up real assets, and this foreign liquidity dynamic is crucial part of that.

Nick: Right, and , when we kind of look at the Middle East, I suppose it's slightly different there in that we've got pegged currency. So haven't really benefited from those fluctuations in currencies. Peter, what's your perspective on this?

Peter: Yeah. Well look, I think historically the Middle East was always seen as the source of capital. And, when asset managers interacted with the region, it was very much historically that was the nature of the relationship. But I think what's really changed in recent years is that asset managers such as Aberdeen are seeing significantly more opportunity in the region than they ever did before. We actually did a review of our equity holdings in the Middle East versus where they were five years ago, and we're investing 15 times as much equity capital into the region. We've also launched, GCC infrastructure JV, which is deploying, sizable into the region as well, and also on the fixed income side. So I've seen, you know, a complete change where the region is being, viewed as an area of opportunity. You know, there's also been important changes and reforms which have helped develop this. And, in 2019, when the Saudi Tadawul entered into the MSCI emerging markets, this triggered a significant inflow of money, both passive and also active, as that market, became more available for investment.

Nick: Yeah. No, you're right to highlight the invest ability of the Middle East. At the moment, I feel like you have every, every week, pointing out to clients now that the Middle East, in terms of opportunity size, is represented by the emerging market benchmark, it's actually pretty similar to Latam these days, which I don't think most people who are in emerging markets every day is something that they realize. Both of you have pretty good visibility into what clients are doing at the moment. What's your perspective on clients and their allocations, particularly regarding allocations towards emerging markets. Because one theme that's been dominant recently is just being under allocation towards emerging markets and the potential for more client allocations, particularly as you know, the US is a bit wobbly at the moment.

Alex: Yeah. Perhaps I'll start with that one. I mean, I think it's fair to say there's been a warming up to changing allocations in emerging markets. So I can certainly sense client interest rising. And look, we're one of the biggest investors in Asia and EM so we have a global business. So you do get a good sense of what allocators are thinking about across the world. And I think there's more conversations happening. There's more interest. But flows have not really picked up. EM has been attracting as an allocation, it has attracted positive flows. It's the only asset class to do that since since 2012, positive flows alongside developed markets, global allocations in the US. But as a portion of assets it's really shrunk. So you know incrementally more money has gone to the US. More money's gone to develop markets. EM is about if you look at EPRF data is about 5 to 6% of client portfolios. It's around 12% of the ACWI. But the US is 65% of the MSCI ACWI benchmark, 72% of the MSCI world benchmark. So the US is still very, very dominant. And I think that when I was talking earlier about this flow of liquidity into the US being you know, some government assets, pension funds and retail assets, all kind of asset allocators, we call them. Asset allocations don't necessarily move that quickly. So I wouldn't say that we've yet seen clients start to wholesale shift. But if they do shift, I think this is worth mentioning because you touched on the size of the market. The market cap of MSCI EM is seven times larger than it was in 2008, and that's because been helped by domestic investors and market openings in China and the Middle East as well. Small cap similarly, market cap is seven times larger than it was in 2008, so the potential to absorb assets is actually a lot higher. When asset allocators do start to come back, perhaps go overweight. And even those numbers kind of underestimate, you know, you got India 7 trillion market cap market and China 12 trillion. They're both underrepresented in MSCI EM. So it's just this vast kind of iceberg underneath global markets.

Nick: Yeah, and Peter are you seeing any shifts in terms of where your clients are thinking about investing? 

Peter: I think Nick, that probably my observations are quite similar to Alex's. So Middle Eastern investors have been allocated to emerging markets significantly for a number of years. I'd say that this increased dialog and increased interest, as we're seeing the relative performance versus DM pickup. And I think there is an acknowledgment amongst investors that there are some pretty serious challenges facing, the developed market countries, both in terms of budget positions and political uncertainty. And actually in many cases, emerging markets are very well placed. And so although I haven't seen significant moves into emerging markets, I think we're not too far away from seeing that from Middle Eastern investors.

Nick: Yeah, I suppose one one thing that's been quite interesting is if you think about, you know, the changing kind of flows and investment base in emerging markets, you know, much has been made of the rise of domestic investors and particularly things like the domestic pension fund industry, you know, that generally being seen as quite a good thing for local markets inverts markets become less dominated by kind of so-called foreign hot money that kind of comes and goes. And actually there's a more permanent capital base that's investing in in markets locally. When you look at your respective markets and perhaps touch on the Asian ones first, are they fairly homogenous in terms of the amount of domestic investment into their markets that we're seeing or is it there is a quite a big difference in terms of, you know, which countries tend to be larger domestic investors versus others.

Alex: Yeah, there are, it's a good question. There are significant differences across the region. And I think it's definitely true that, you know, the capital base has been building up in these countries as they get wealthier, it sort of happens naturally alongside GDP. There's some areas where retail investors are very dominant. So China is you know, I think a huge portion of the market there is owned by retail investors, foreign ownership is a small sub 10% portion of overall Chinese ownership. And that's because partly it’s difficult to access the market. And, you know, we're seeing the rise of the retail investor in other places. So India is clearly the most interesting in this department. I mean, they brought through some of the reforms they bought through, was making it easier to invest in your pension in these systematic investment plans, SIPs which is what they are called in India. And that is just literally, you know, millions upon millions of Indians adding 10% or so their salary every month and investing here in the market, they're adding 3 billion US a month to the market. This is just growing month on month. So, you know, it's true that the capital bases are changing. Like in developed markets, retail is playing a bigger and bigger role in various ways. So yeah, it's something to watch. And it is very, very interesting. Just on the domestic pension industries and that sort of thing, my experience, you know, we are a global asset manager. So we would be dealing with non domestic allocations typically. And they do tend to still be very biased towards the US and developed markets. Right. In terms of what we see. So I think that that's the institutional investors, domestic investors dealt with slightly differently to what we see.

Peter, in the Middle East you've got very well capitalized sovereign wealth funds. Have you seen much shift in terms of how they're investing?

Peter: I haven't seen any immediate shift, in terms of their international exposures. But I think what's been clear is that the overall strategic direction has changed, and there's been even more emphasis placed on what's happening at home. So it doesn't matter whether you're talking about UAE, Kuwait, Saudi, Qatar, you know, they're all looking to diversify away from oil, build out their local economies. And this is something which they're being very, very successful with. And I think infrastructure is one of the key enablers for everything that they're trying to do. I would say there are some distinctions between the countries, and a lot of this comes down to the level of natural resources that each of the different GCC countries have. But then also in terms of the population.

Nick: And the retail investors in, in the Middle East, do they have much of an impact on markets?

Peter: I think relative to Asia, it would be significantly less. It's still very much an institutional and government led, you know, initiatives. But the Saudi’s, are the most urgent in terms of their need for diversification because the population of local Saudi’s is over 20 million. And you can compare that to UAE with 1 million and Qatar with under 500,000. So there's definitely some differences in terms of the urgency, but the direction is consistent across the board. 

Nick: Great. Peter, I wanted to pick up on an issue that you raised a minute ago just on on capital market reforms and, you know, things have been changing in Saudi quite a bit lately. And I think even in the last few days, there's been some news about potentially relaxing foreign ownership limits on on Saudi companies. How important are those kind of things to local capital markets? 

Peter: Nick I think has transformed it. So I think historically GCC markets were seen as being, you know, opaque, you know, the regulation wasn't seen as being market leading. And, you know, these changes have meant that the capital markets are much more accessible for, you know, international investors, which has been huge. And these reforms have included things like market settlement, listing of short selling restrictions, introduction of the derivatives market. So these are all kind of key reforms that have taken place and have led to the growth. And it feels like it's unlock billions of capital. But I feel there's still further that this can go.

Nick: Yeah. No, I mean I remember years ago we ran a fund that could invest in Saudi back in the day when it was quite challenging to invest in Saudi, from a regulatory perspective. Yeah. We struggled for years to actually get the local Saudi market open in terms of getting the paperwork done and getting, compliance comfortable with some of the settlement issues in the, in the market. So that really contrasts with today, where it's relatively straightforward now opening Saudi or indeed any of the Middle East markets. 

Peter: Indeed. Sorry  Nick, just to jump in as one final point on this, is that in addition to the kind of stock markets, I think what you've seen is, there's, free zones and financial hubs are beginning to really develop. So both the ADGM, which is where we're based, and then the DIFC in Dubai, and then clearly the CMA and Saudi, these regulators are becoming, more and more highly sought after. And, you know, this is becoming a place where people feel that they can actually set up their businesses and invest from and certainly in Abu Dhabi, we've seen a number of hedge funds, decide to move significant presence not just from a distribution or operational perspective, but actually the key investment decision makers being based in the region, which again, is a big support for the local markets.

Nick: Yeah. No. Absolutely. And we yeah, that's one of our one of our principles behind having quite a large position in the UAE in our emerging market funds. It's just this business formation that we're seeing and that just driving all other parts of the economy, including the banking sector and the property sector and the like, and it's a very exciting region from an EM perspective today. Thinking about Asia, Alex, so huge reforms have been going on in places like Korea and China. I feel like Asia is a bit more developed in some of these reforms, perhaps relative to the Middle East. 

Alex: Yeah, I think so. And yes, you're not looking at reforms that are kind of as transformational. But you're coming from a much, a much better starting point. But I think it would be stupid to overlook how important some of the reforms are, in Asia, you know, and it's not actually in EM, but I think Japan has played quite an important role in this. Very typical North Asian country has got a lot in common with Taiwan and China. Big reserves, not a fantastic capital market relative to its development. And, you know, the TSC has gone through this program. Delisting is breaking up these conglomerates. And I think that that's inspired change. And certainly other countries and other policymakers are trying to replicate the success that Japan had started to have in transforming  its capital markets. So you've got, you know, in China, you've got this this SOE reform program. You've also got opening up of new exchanges to get money to innovation. I mean, clearly that's the must have been pretty helpful because innovation's ripping at China at the moment in Korea you've got value up. That’s a lot about better conditions for dividends, encouraging share buybacks, more transparency. So breaking up these chaebol networks that dominate the listed markets. So yeah, so there's, you know, North Asia's reforming, trying to open up more areas to invest in. And I think that that will help. But it can also help with wealth inequality because the property market where a lot of assets are is quite tricky for a lot of Koreans to get into. In South Asia, actually it's different, I would say challenges, liquidity, pretty consistently actually. So governments, trying to inject liquidity in various different ways. Most of the Southeast Asian markets struggle with this. Recently AMS which is the Monetary Authority of Singapore has come out with a mandate. They're going to invest 5 billion Singh into small and mid-cap stocks in Singapore. I mean, these are just these names are so illiquid at the moment. Singapore sort of concentrated in a few banking stocks. And that's, you know, that's pulled liquidity out of the bottom end of the market so that they're trying to tackle this. And then they've been giving mandates to managers to invest in small caps and to trade more frequently. Philippines overhauling tax and various other things. India similarly is taking measures to reduce the administrative burden of investing in India for foreigners.

Nick: Now, it's interesting what you mention about Singapore and the so-called national team buying. You know, we've seen plenty of that out of China, certainly in the last couple of years. I mean, I suppose, you know, thinking about reforms and, you know, particularly in China, the idea that property shouldn't be used as an investment asset. Are we saying, you know, generally retail investors shift away from property is their largest asset within within the household. And so we're seeing governments more successful in promoting equity investments in the various regions? 

Alex: I think this is very ingrained in the mindset here in terms of how people think about investing and what assets should do. So, I don't think that has substantially changed, but definitely in Singapore, there is efforts to try and change this so that what you will find is when investors invest in equity markets or bond markets, they treat it as if they're investing in a property. That's how they view it. So that means they focus on yield at the expense of capital returns. And they might well use a lot of leverage to do it. And that's, you know, that's how they think. Well, how much do I get paid by this investment. And I want that payment monthly. And, you know, if you can get a product that yields 10% and pays monthly, you're going to sell a lot of that product in the wholesale market out here. Okay. Of course, that erodes your capital. So the Singaporean government certainly, and some of our clients in Singapore, particularly the global banks, have really pushed an education program. They really push this focus on total returns. But I would say this behavior and mindset is is very ingrained and part of it, as you suggest, Nick, is that, you know, if you view property as an investment and as a Singaporean, most of your money is in your properties. You're less bothered by the capital returns on your investment portfolio, right. But if you're a Western investor and you've got your, you know, your pension, your depending on it, you really need to maximize the total returns from it. So I would say that still persists. It's something that they're trying to change. 

Nick: Yeah. And I guess, Peter, for in your region and in the UAE, I would imagine property is still the key asset within households given how equity markets are still relatively undeveloped.

Peter: I think that's fair, Nick. Real estate is a big part of the economy as a percentage. And historically, this is what people has chosen to invest in and I haven't seen any major change to that. It is almost the default that people do with their savings is by it, by property. Mutual funds there is increasing interest, but I think that people still value being able to kind of touch and feel, property in a way that they can't quite do the same in terms of a mutual fund. And I think similarly to Asia, there is a real focus on yield when they do, maybe with time will see things change. And there's a number of, pension schemes which are beginning to develop here in the region, which are giving people more options to invest in mutual funds. But still at the moment, it's very property focused. 

Nick: Well, guys, I think that's probably a pretty good place to wrap things up. So yeah, thanks very much to both Peter and Alex for joining the podcast. 

Alex: Thanks, Nick. It was real pleasure. Joining you. 

Peter: Yeah. Thank you Nick. Thank you Alex. 

Nick: Great and thanks to everyone who took the time today to listen in. If you enjoyed it then please download our other podcasts from our website or wherever you normally get your podcasts. Watch out for the next episode and tune in.