Study: Middle East sovereign investors explore emerging markets amid rising geopolitical tensions
RIYADH: Middle Eastern sovereign investors are following their global counterparts and favoring India and other emerging markets amid concerns about geopolitical tensions, an analysis says.
In its latest report, US investment management firm Invesco said 88 percent of global wealth funds, including 100 percent of funds in the Middle East, view the South Asian country as the most attractive investment destination among emerging markets.
The Saudi Public Investment Fund has already expressed interest in emerging markets such as India. In September 2023, the Kingdom's Minister of Investment, Khalid Al-Falih, raised the possibility of opening a branch of a sovereign wealth fund in the Asian country and investing in Indian startups serving the Saudi market through venture capital funds.
Commenting on her firm's report, Josette Rizk, head of Middle East and Africa at Invesco, said: “Amid an unpredictable macroeconomic environment, sovereign investors are recalibrating their portfolios to focus on equities, private credit and hedge funds.”
She added: “Emerging markets are becoming more important as funds take a selective approach.”
According to the report, investment funds are looking to restructure their portfolios to reflect the new macroeconomic environment. In the Middle East, 27 percent of funds and 50 percent in the rest of the world plan to invest more in infrastructure next year.
Invesco's findings are based on the views of 140 chief investment officers, asset class heads and senior portfolio strategists from 83 sovereign wealth funds and 57 central banks, which together manage $22 trillion in assets.
Geopolitical tensions pose risks to economic growth
The analysis found that 95 percent of sovereign investors in the Middle East see geopolitical tensions as the biggest risk to economic growth over the next twelve months.
According to the report, inflation also continues to be a major concern for these investors: 43 percent of sovereign wealth funds and central banks worldwide and 68 percent in the Middle East expect it to settle above central bank targets.
The study also found that nearly three-quarters of investors – 71 percent globally and 70 percent in the Middle East – expect interest rates and bond yields to remain in the mid-single digits over the long term, suggesting a shift in expectations.
The rise of private credit
The report found that private lending is also gaining popularity, with only 35 percent of sovereign wealth funds globally and 22 percent in the Middle East currently not investing in private lending.
Invesco believes that the attractiveness of private credit is based on its diversification from traditional fixed income and its relative value compared to traditional debt.
According to the study, the US is the most attractive market for private credit, with 67 percent of wealth funds worldwide and 71 percent in the Middle East considering it the preferred option.
However, according to Invesco, there is growing interest in private debt in emerging markets, with more than half of respondents, including 58 percent from the Middle East region, convinced that there are untapped opportunities in these countries.
“Private credit is becoming increasingly attractive to sovereign wealth funds, with many investing through funds and direct deals. Sovereign wealth funds in the region are active in developed markets but are also exploring emerging markets, balancing defensive and opportunistic strategies to compete,” Rizk added.
The implementation of AI
Invesco also found that more than a third of sovereign investors worldwide use advanced technologies such as artificial intelligence in their investment process.
The vast majority – 93 percent globally and 100 percent in the Middle East – believe that AI will play a role in their organization at some point.
The rise of generative AI has prompted 66 percent of sovereign wealth funds and central banks worldwide and 83 percent in the Middle East to rethink their current AI strategies and explore new applications for the technology.
The survey also found that half of these investors globally and 80 percent in the Middle East believe that using AI can increase returns.
“Sovereign investors in the region are increasingly integrating AI into their investment processes, realising that it can become an indispensable tool. While there are challenges, funds are investing in training and partnerships to overcome obstacles,” Rizk said.
Growing importance of ESG
According to Invesco, investors participating in the study see greenwashing as one of the biggest challenges. Globally, 84 percent of wealth funds said it was in favor of it, and in the Middle East, 94 percent.
The report also found that sovereign investors are increasingly taking responsibility, with 50 percent of investors in the Middle East modeling and monitoring their portfolios to combat climate change.
“The acceptance of ESG (environmental, social and governance) criteria continues to grow among Middle East central banks, while sovereign wealth funds are refining their approach as the market matures,” Rizk said.
She added: “Investors are increasingly recognizing climate risk as a material factor and are aligning their portfolios with global climate goals. To drive the energy transition, engagement and allocation in renewable energies is preferable to complete divestment.”
The charm of gold
The analysis found that gold is becoming more attractive. Over the past three years, 70 percent of central banks in the Middle East have increased their allocations to the yellow metal.
According to the report, central banks are in the process of strengthening and diversifying their reserves: 53 percent of central banks worldwide plan to expand their reserves, 52 percent plan to increase diversification.
The rising US debt is having a negative impact on the global role of the dollar, say 64 percent of respondents worldwide and 33 percent in the Middle East.
About 18 percent of central banks, including 20 percent in the Middle East, believe that the U.S. dollar's position as the world's reserve currency will be weaker within the next five years.
“Amid global uncertainties, central banks in the region are strengthening and diversifying their reserves. Gold's appeal is growing due to concerns about rising US debt. Allocations to emerging markets are increasing as central banks seek to boost returns and mitigate risks,” Rizk said.
A survey conducted by the World Gold Council in June found that despite ongoing macroeconomic and political uncertainties and rising gold prices, more central banks plan to increase their gold reserves within a year.
According to the WGC, 29 percent of central banks worldwide expect to increase their gold reserves over the next twelve months – the highest level since the survey began in 2018.
“Despite record demand from the official sector over the past two years and rising gold prices, many reserve managers remain enthusiastic about the yellow metal,” said Shaokai Fan, head of central banks at the World Gold Council at the time.
