Sovereign investors in Middle East scrutinize emerging markets as geopolitical tensions rise, study says
RIYADH: Middle Eastern sovereign investors are following their global counterparts in favoring India and other emerging markets amid concerns over geopolitical tensions, an analysis says.
In its latest report, Invesco, an American investment management company, said that 88 percent of global investment funds, including 100 percent of funds in the Middle East region, consider the South Asian country the most attractive destination for investment among emerging economies.
Saudi Arabia's public investment fund has already expressed its appetite in developing countries such as India. In September 2023, the kingdom's Minister of Investments, Khalid Al-Falih, expressed the possibility of setting up a sovereign wealth fund office in the Asian country, as well as investing in Indian start-ups catering to the Saudi markets through venture capital funds.
Josette Rizk, head of Middle East and Africa at Invesco, commented on her firm's report: “Amid an unpredictable macro environment, sovereign investors are recalibrating their portfolios, moving towards equities, private credit and hedge funds.”
She added: “Emerging markets are gaining momentum and funds are taking a selective approach.”
Investment funds are looking to reshape their portfolios to reflect the new macro environment, with 27 percent and 50 percent in the Middle East planning to increase allocations to infrastructure next year, according to the report.
Invesco's findings are based on the views of 140 chief investment officers, asset class leaders and senior portfolio strategists at 83 sovereign wealth funds and 57 central banks, which collectively manage $22 trillion in assets.
Geopolitical tensions threatening economic growth
The analysis revealed that 95 percent of sovereign investors in the Middle East region saw geopolitical tensions as the most serious risk to economic growth over the next 12 months.
Inflation also remains a significant concern for these investors, with 43 percent of sovereign wealth funds and central banks globally and 68 percent in the Middle East expecting it to settle above the top banks' targets, according to the report.
The study further noted 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 loans
Private credit is also gaining popularity, the report says, with only 35 percent of sovereign wealth funds globally and 22 percent in the Middle East currently having no private credit investments.
Invesco believed that the appeal of private credit is driven by diversification away from traditional fixed income and its relative value compared to conventional debt.
The study said the U.S. is the most attractive market for private loans, with 67 percent of investment funds globally and 71 percent in the Middle East ranking the country as a favorite option.
However, Invesco said interest in emerging market private debt is growing as more than half of respondents, including 58 percent in the Middle East region, believe there are unexplored opportunities in these countries.
“Private credit is increasingly attractive to sovereign wealth funds, with many investing through funds and direct deals. Sovereign wealth funds in the region have developed markets, but are also exploring emerging markets while balancing defensive and opportunistic strategies to navigate the competitive landscape,” Rizk added.
Implementation of AI
Invesco also noted that more than one-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 AI will eventually play a role in their organization.
The rise of generative AI has prompted 66 percent of sovereign wealth funds and central banks globally and 83 percent in the Middle East to reassess 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 implementing AI can increase returns.
“Sovereign investors in the region are increasingly adopting AI into their investment processes and realizing its potential to become an essential tool. While there are challenges, funds invest in training and partnerships to overcome obstacles,” said Rizk.
The growing importance of ESG
Invesco said investors who took part in the study see greenwashing as one of the biggest challenges, with 84 per cent of investment funds globally and 94 per cent in the Middle East citing it.
The report also found that sovereign investors are moving towards greater accountability, with 50 percent of accounts in the Middle East modeling and tracking their portfolios to combat climate change.
“ESG (environmental, social and governance) adoption continues to rise among central banks in the Middle East, while sovereign wealth funds refine their approach as the market matures,” said Rizk.
She added: “Investors are increasingly recognizing climate risk as a material factor and aligning portfolios with global climate goals. Plugging in and allocation of renewables is prioritized over total divestment to drive the energy transition.
The charm of gold
The analysis revealed that gold is gaining in attractiveness. In the past three years, 70 percent of central banks in the Middle East region have increased allocations of the yellow metal.
According to the report, central banks are strengthening and diversifying reserves, with 53 percent globally planning to increase the size of their holdings and 52 percent planning to further diversify.
Rising US debt levels are 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 the US dollar's position as the world's reserve currency will weaken within five years.
“Amid global uncertainty, central banks in the region are strengthening and diversifying reserves. Gold's appeal is growing on concerns about rising US debt levels. Allocations to emerging markets are increasing as central banks seek to raise yields and mitigate risks,” Rizk said.
A June survey by the World Gold Council found that more central banks plan to increase their gold reserves within a year, despite persistent macroeconomic and political uncertainty and rising gold prices.
According to the WGC, 29 percent of central banks worldwide expect to increase their gold reserves in 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 of the yellow metal remain bullish,” Shaokai Fan, head of central banks at the World Gold Council, said at the time.
