Sovereign investors in Middle East explore emerging markets as geopolitical tensions rise, study says
RIYADH: Middle Eastern sovereign investors are following the lead of their global counterparts, prioritizing India and other emerging markets amid concerns over geopolitical tensions, an analysis suggests.
In its latest report, Invesco, a US-based investment management firm, said that 88 percent of global wealth funds, including 100 percent of those in the Middle East region, consider the South Asian country the most attractive investment destination among emerging economies.
Saudi Arabia’s Public Investment Fund has already expressed its appetite for emerging nations like India. In September 2023, the kingdom’s investment minister Khalid Al-Falih raised the possibility of establishing a sovereign wealth fund office in the Asian country, as well as investing in Indian startups targeting Saudi markets through venture capital funds.
Commenting on her firm's report, Josette Rizk, head of Middle East and Africa at Invesco, said: “In an unpredictable macroeconomic environment, sovereign investors are recalibrating their portfolios, moving towards equities, private credit and hedge funds.”
He added: “Emerging markets are gaining traction, with funds taking a selective approach.”
According to the report, mutual funds are looking to reshape their portfolios to reflect the new macroeconomic environment, with 27% and 50% in the Middle East planning to increase infrastructure investments in the coming year.
Invesco’s findings are based on the views of 140 chief investment officers, asset class managers and senior portfolio strategists from 83 sovereign wealth funds and 57 central banks, which collectively manage $22 trillion in assets.
Geopolitical tensions threaten economic growth
The analysis found that 95 percent of sovereign investors in the Middle East region believe that geopolitical tension poses the most serious risk to economic growth over the next 12 months.
Inflation also continues to be a significant concern for these investors, the report says, with 43% of sovereign wealth funds and central banks globally and 68% in the Middle East expecting it to be above the targets of major banks.
The study also found that nearly three-quarters of investors (71% globally and 70% in the Middle East) expect interest rates and bond yields to remain in the low to mid-single digits over the long term, indicating a shift in expectations.
The Rise of Private Credit
The report found that private credit is also gaining popularity: only 35% of sovereign wealth funds globally and 22% in the Middle East currently have no investments in private credit.
Invesco believes that the appeal of private credit is due to its diversification from traditional fixed income and its relative value to conventional debt.
The study says the United States is the most attractive market for private credit: the country is considered the preferred option by 67 percent of mutual funds globally and 71 percent in the Middle East.
However, Invesco said there was growing interest in emerging market private debt, as more than half of respondents, including 58% in the Middle East region, believed there were untapped opportunities in these countries.
“Private credit is increasingly attractive to SWFs, with many investing through direct funds and deals. SWFs in the region have developed markets, but are also exploring emerging markets, balancing defensive and opportunistic strategies to navigate the competitive landscape,” Rizk added.
The implementation of AI
Invesco also noted that more than a third of sovereign investors globally are using advanced technologies such as artificial intelligence in their investment process.
The vast majority (93% globally and 100% in the Middle East) believe that AI will eventually play a role in their organization.
The rise of generative AI has prompted 66% of sovereign wealth funds and central banks globally and 83% 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% in the Middle East believe that implementing AI can increase returns.
“Sovereign investors in the region are increasingly embracing AI in their investment processes, recognizing its potential to become an essential tool. While challenges exist, funds are investing in education and partnerships to overcome barriers,” Rizk said.
Growing importance of ESG
Invesco said that investors who participated in the study considered greenwashing to be one of their biggest challenges, with 84% of wealth funds globally and 94% in the Middle East saying so.
The report also found that sovereign investors are moving toward greater accountability: 50 percent of accounts in the Middle East are modeling and monitoring their portfolios to address climate change.
“The adoption of ESG (environmental, social and governance) criteria continues to grow among central banks in the Middle East, while sovereign wealth funds refine their approach as the market matures,” Rizk said.
He added: “Investors are increasingly recognizing climate risk as a material factor and aligning portfolios with global climate goals. Commitment and allocation to renewables are preferred over complete divestment to drive the energy transition.”
The allure of gold
The analysis revealed that gold is gaining traction. Over the past three years, 70 percent of central banks in the Middle East region have increased their allocations to the yellow metal.
According to the report, central banks are strengthening and diversifying their reserves, with 53 percent globally planning to increase the size of their holdings and 52 percent planning to further diversify.
Rising U.S. debt levels have a negative impact on the global role of the dollar, according to 64 percent of respondents globally and 33 percent in the Middle East.
About 18 percent of central banks, including 20 percent in the Middle East, believe the U.S. 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 amid concerns about rising U.S. debt levels. Emerging market allocations are rising as central banks seek to improve yields and mitigate risks,” Rizk said.
In June, a survey by the World Gold Council found that a growing number of central banks plan to increase their gold reserves within a year, despite ongoing macroeconomic and political uncertainties and rising gold prices.
According to the WGC, 29 percent of central banks worldwide plan to increase their gold reserves in the next 12 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,” Shaokai Fan, head of central banking at the World Gold Council, said at the time.
