14 minute read
Investment
COMMENT
Steven Rees, head of investments for the Middle East and North Africa, and David Stubbs, global head of crossasset thematic strategy at JP Morgan Private Bank
Smart security: Investing in a safer world
We explore how a rapidly changing geopolitical landscape has driven investment prospects in certain sectors
In recent years, elections, trade wars and military conflicts have caused significant volatility in asset markets, forcing investors to combat a rapidly changing geopolitical landscape.
Unstable geopolitical environments are likely to be the decisive pillars of the 2020s and can have a significant impact on investment.
While such an environment presents numerous challenges, there are also sectors of the market that can benefit, as governments, businesses and families seek to protect themselves in an increasingly fragmented world. Key areas of security that may benefit from this environment include computer system integrity, defence and border security systems.
Collectively, these areas are referred to as “smart security”, and the drivers and investment prospects for each of these three pillars are as follows.
BOOM TIMES FOR CYBERSECURITY
Cybersecurity is essential to the smooth “digital transformation” of the economy. Many of the exciting high-confidence development sectors, such as 5G, cloud computing, internet of things and artificial intelligence, are only achievable if organisations can secure their networks and maintain the confidentiality of client data. Data breaches may erode people’s faith in the technology they utilise. Consequently, cybersecurity technology, like semiconductors, is a necessity in our digital age and will benefit as the digitally connected world evolves.
The move to remote working due to the pandemic widened the “attack surface,” as hackers shifted their focus to exploiting the vulnerabilities in employee home-computing setups. This has prompted consumers to acquire new cybersecurity software and organisations to modify their cyber-setup, in order to protect cloud-based infrastructure that is essential for remote working.
Moreover, with global crises on the rise, so is the need for cybersecurity. Countries are now investing extensively in cyber security not only to defend their own systems and society, but also to play offensive and be able to impede their adversaries’ military and domestic infrastructure capabilities.
Countries in the Middle East regularly come up with new measures to curb cybercrime. In November 2021, the UAE Central Bank established a new Networking and Cyber Security Operations Centre to help defend the financial system’s IT infrastructure against cyberattacks. In addition, the Saudi Central Bank (formerly Saudi Arabian Monetary Authority) has issued a cybersecurity framework to enhance the cybersecurity posture of financial institutions. It appears that there are catalysts for a multi-year forced upgrade cycle in the global commercial sector, as well as in public sector organisations. Due to highprofile hacks, cybersecurity was already at the top of corporate expenditure priorities in surveys conducted before the Ukraine crisis.
IMPORTANTLY, CYBERSECURITY IS INVESTABLE
In addition to the above growth factors, there are numerous aspects to investing in cybersecurity
“ORGANISATIONS MUST ALSO KEEP RAISING THE BAR AND ENSURING THAT THEY ARE INVESTING IN BOTH THE TECHNOLOGY AND THE KNOWLEDGE REQUIRED TO COMPREHEND THE NATURE OF THE CHALLENGES THEY WILL ENCOUNTER”
that may appeal to investors, including potential appreciation during periods of cyber conflict and an active merger and acquisition cycle. These considerations have steadily gained traction in the market, resulting in cyber equities outperforming the wider market in recent quarters.
Therefore, investments in cybersecurity will go hand in hand with the digital transformation megatrend and is a beneficiary of the escalating geopolitical tensions in today’s world.
DEFENCE SPENDING IS BACK AND HERE TO STAY
Following the conclusion of the Cold War, the world experienced a “peace dividend,” in which military spending as a percentage of budgets and GDP decreased. This allowed resources to be redirected to schools, hospitals and tax cuts, which contributed to the boom in the West in the 1990s. We are currently witnessing a global reversal of this trend.
When it comes to investing in defence firms, we find that they have the “defensive” traits of being unaffected by the economic cycle, typically providing inflation protection, have a strong cash-flow position and dividend history and a reasonable valuation starting point.
THE THIRD SUB-COMPONENT: SMART BORDERS
In Western democracies, immigration is perhaps the most potent political issue. Fears about the nation state disintegrating in a more globalised world have been major wedge issues for recent market-shaping political movements. It appears that governments will continue to place a premium on securing borders against those who do not have legal status or who are infected with a virus. Furthermore, immigration flows are now obviously part of the “hybrid-war” strategy, with agitators attempting to put pressure on Western democracies by bringing migrants to their borders. Also, if society fails to adjust to climate change, one may argue that border security is a longterm hedge. According to current forecasts, global warming will cause tens of millions of people to migrate to the northern developed countries.
In conclusion, in an increasingly digital and connected world, cybersecurity should be at the top of the agenda for businesses. Organisations must also keep raising the bar and ensuring that they are investing in both the technology and the knowledge required to comprehend the nature of the challenges they will encounter.
Is the UAE utilising property REITs to its long-term benefit?
Local real estate investment trusts can benefit from a different approach to real estate lending by local banks and an enhanced legal framework to support their growth and popularity
Thierry Leleu, CEO Equitativa
Areal estate investment trust or REIT is a company that owns, operates and finances income-generating real estate for its shareholders. Such companies look to pool the capital of several investors, making it possible for individuals and institutional investors to earn dividends from their real estate investments. They also remove the risk of needing to buy, manage or finance any property themselves.
To date, however, REITs only represent a small part of real asset ownership in the region when compared to Europe, the US or developed Asia-Pacific.
There needs to be a stronger case made in favour of REITs already existing in the UAE because they support the underlying strength of the property market, as is witnessed in other real estate markets around the world. However, that potential for REITs operating in the UAE must be supported by small, yet significant changes on access to capital, particularly international, and a wider understanding of the benefits that REITs provide.
CURRENT SITUATION IN THE UAE
From a macro-economic and demographic standpoint, the forecasts for the UAE are positive: GDP growth should be in excess of 5 per cent for 2022 and 2023 and the population is increasing with a forecast in excess of 5.6 million people in Dubai and 12 million people residing in the UAE by 2040. Those factors are conducive to both a short-term recovery and long-terms growth of the real estate sector.
REITs REMOVE THE RISK OF NEEDING TO BUY, MANAGE, OR FINANCE ANY PROPERTIES THEMSELVES
Indeed, as the real estate market continues to recover this year, we are witnessing positive momentum on the occupancy in property assets across Dubai and the UAE. The UAE having successfully established itself as a safe sanctuary for business, due to both its e cient handling of the pandemic and its progressive legislation, is ensuring that more companies and entrepreneurs want to base their operations here or expand an already existing presence.
In the o ce sector, the positive outlook, coupled with the obsolescence of certain office stock, the moderate pipeline of new deliveries and the occupiers’ wariness of strata developments, should bode well for fully owned quality assets.
On the logistics and light industrial front, the comments made by Sheikh Mansour bin Zayed Al Nahyan, Deputy Prime Minister of the UAE and Minister of Presidential A airs at the World Government Summit earlier in the year, as to a relative lack of growth in the UAE industrial sector, were very welcome. The government plans to signifi cantly increase its focus on areas in the industrial sector, including pharmaceuticals and food supplies and that is an area where we see opportunities for REITs to grow. The logistics and light industrial sectors have been favourites amongst real estate asset investors in most mature markets and we anticipate the UAE and Gulf region to follow suit on the back of the government’s emphasis for industrial development. Social infrastructure, notably in the education and healthcare sectors, will also need to grow given the aforesaid demographic trends. Those assets typically lend themselves well to REIT ownership as the healthcare and education operators tend to be asset light and the REIT can provide both the capital infl ow and the stability of institutional stability.
Looking at other markets in Asia Pacifi c like Singapore or in the US and Europe, established REITs play a key role in supporting and stabilising the real estate markets. We have not yet reached a similar level of maturity in this region but the institutionalisation and internationalisation of the local real estate markets should foster this path.
SUPPORTING REITS IN THE UAE
To become signifi cant real estate asset owners and support economic growth that guards against future economic downturns, REITs in this region need greater access to more international institutional investors, be they pension funds and insurance companies that typically like the infl ation-hedging characteristics of real estate or global asset managers that will have both dedicated real estate strategies and exchange “LOOKING AT OTHER MARKETS IN ASIA PACIFIC LIKE SINGAPORE OR IN THE US AND EUROPE, ESTABLISHED REITs PLAY A KEY ROLE IN SUPPORTING AND STABILISING THE REAL ESTATE MARKETS”
THE FORECASTS FOR THE UAE ARE POSITIVE: GDP GROWTH SHOULD BE IN EXCESS OF
5%
FOR 2022 AND 2023
traded funds that will replicate indexes, or investment managers. Whilst they have a clear interest in the region, which provide attractive yields, their involvement today remains subdued, notably owing to the perceived lack of liquidity of the stock exchanges and restrained access to nonGCC investors.
Avenues to be explored to foster the growth and attractiveness of local REITs could include both a di erent approach to real estate lending by the local banks and an enhanced harmonised legal framework providing support for growth.
On the fi nancing front, REITs in mature markets see their fi nancing traditionally coming from nonamortising loans or bond issuances at moderate loan-to-value ratios, where the lenders draw comfort from the value of the asset pool provided as security and the underwritten cash-fl ows. This type of fi nancing allows the REITs to distribute cash dividends – which is welcome by both retail and institutional investors. Amortising loans is more the norm at present locally but unfortunately eat away at the cash dividend distribution capability of the REITs, since the funds from operations need to be used to amortise part of the principal of the debt contracted instead of distributed. This deters both retail and institutional investors from investing in REITs which are traditionally perceived as dividend stocks.
As to the legal framework, there were welcome modifi cations to the Federal Law on Commercial Companies in the UAE that became e ective in early January this year. With respect to listed entities, the new Companies Law introduced the possibility for public joint stock companies under certain conditions to issue discounted shares, where the market price of the shares falls below the nominal value. It could be an important step for Dubai International Financial Centre and Abu Dhabi Global Market to consider aligning their regulations onto the Federal laws. Indeed, discounted rights issue are a very common way across mature markets to support the growth of a business, REITs in the present example, through market volatility.
It’s a unique balancing act but if we put the building blocks in place now and open the door to long term institutional capital, then I believe we can enhance the regional real estate market even
Alan’s Corner
Alan O’Neill, author, keynote speaker and owner of Kara, specialists in culture and strategy
Situational leadership
How to use different situational leadership styles to create an adaptive and productive work environment
Ater getting past the usual pleasantries, it was probably ten more minutes before my telephone caller came up for air and took a break. Liz was highly exercised by an infuriating incident that happened that day. She is a very capable project manager with an IT company and her boss, Mike had just given her a new project to complete. With no respect for Liz’ experience, capabilities or commitment, Mike felt it was appropriate to micromanage the situation. Not only did he brief her on the project, but he also ‘helped’ her to construct a detailed plan. That caused enormous frustration and feelings of disrespect in Liz. What a pity.
By coincidence, in the same week I had co ee with Fred, an old friend that works in a company that has recently been acquired. George, the new CEO, is still getting to grips with the acquisition. With a hands-o style, he expects senior people to know what to do and to just get on with it. However, as the operations manager, Fred is now challenged with a new product stream and supply chain. He is struggling to get to grips with it and is deeply concerned about failing. What a pity.
Clearly, both leaders, Mike and George have got it wrong. But they’re not alone, as bosses the world over so o ten get it wrong. Leaders tend to have a primary or default style of management and fail to recognise that not all members of their teams are at the same stage of competence, confi dence or development. This is probably not surprising given that many leadership theories promote particular leadership traits. Thankfully, the world has moved on from Taylorism of the early 1900s, that encouraged a leadership based on the organisation’s needs primarily.
Later theorists such as Kenneth Blanchard opened our eyes to the concept of ‘situational leadership’. In this model, Blanchard encourages leaders to adapt their leadership style based on the learner’s needs and development levels of competence and commitment. Liz, in my fi rst example, needed to be le t alone once briefed. Fred, on the other hand, needed more guidance on what is expected and how to deliver on those expectations in a new operation.
HOW TO ADAPT YOUR LEADERSHIP STYLE TO ANY SITUATION
The initial thing here is for leaders to embrace the concept of ‘one-size does not fi t all’. Both Mike and George will get it right some of the time, for sure. But the risk of getting it wrong is just too great.
As leaders, we have to treat each and every task we set for our people as being di erent. Fred is a very competent operations manager. However, he is now presented with some new complexity and that needs to be learned. But, it doesn’t mean that every other aspect of his job needs to be explained. Hence, without over-complicating it, I’d like to encourage you as a leader to always consider the situation fi rst. Goals. Be very clear on the goals that you want your team member to deliver. Remember SMART goals? Here is a new version: S – Specific, measurable and timebound; M – Motivating; A – Achievable; R - Relevant; and T–Trackable. Take time to align both parties on what is expected. Diagnosis. Stand back, slow down a little and consider the learner’s stage of development. Is s/he competent and committed to this task? There are four possible scenarios; D-1: low competence/high commitment; D-2: low competence/low commitment; D-3: high competence/variable commitment; and D-4: high competence/high commitment. Matching. As a consequence of determining the learner’s level of development, we should therefore adapt our leadership style appropriately. A ‘tellingdirective’ style is appropriate for D-1 level of development. A ‘coaching’ style is right for a D-2. A ‘listening-supportive’ is appropriate for D-3 and a ‘delegating’ style works well for D-4. In other words, four di erent styles to match four di erent situations.
THE LAST WORD
You’ve heard it said that employees don’t leave organisations, they leave their bosses. I’ve seen this truth, having witnessed it fi rst-hand in the countless employee engagement surveys we have administered over the years.
We’re living in the strangest of times and the ‘great resignation’ is real. Never before as much as now, do leaders have to selfrefl ect on their own leadership style.
Ask yourself: What’s your primary or default style? How e ective is your ability to adapt your style to the situation and the individual that you’re leading?
