Middle East sovereign investors explore emerging markets as geopolitical tensions rise, study finds
RIYADH: Sovereign investors in the Middle East are trailing their global counterparts, prioritizing India and other emerging markets amid concerns over geopolitical tensions, an analysis shows.
In its latest report, Invesco, a US-based investment management firm, said that 88% of global investment funds, including 100% of those 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 emerging countries such as India. In September 2023, the Kingdom's investment minister, 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 targeting the Saudi markets through funds of risk capital.
Commenting on her firm's report, Josette Rizk, head of the Middle East and Africa at Invesco, said: “Amidst an unpredictable macro environment, sovereign investors are recalibrating their portfolios, moving towards equities, private credit and hedge funds.”
She added: “Emerging markets are gaining ground as funds take a selective approach.”
According to the report, investment funds are looking to reshape their portfolios to reflect the new macro environment, with 27% and 50% from the Middle East planning to increase allocations to infrastructure over the next year.
Invesco's findings are based on the views of 140 investment managers, heads of asset classes and portfolio strategists from 83 sovereign wealth funds and 57 central banks, which together manage $22 trillion in assets.
Geopolitical tensions that pose risks to economic growth
The analysis showed that 95% of sovereign investors in the Middle East region saw geopolitical tension as the most serious risk to economic growth over the next 12 months.
According to the report, inflation also remains a significant concern for these investors, with 43% of sovereign wealth funds and central banks globally and 68% in the Middle East expecting it to settle above the top banks' targets.
The study also noted that almost three-quarters of investors – 71% globally and 70% in the Middle East – expect interest rates and bond yields to remain at their long-term average, indicating a shift in expectations.
Increase in private credit
The report noted that private credit is also gaining popularity, with only 35% of sovereign wealth funds globally and 22% in the Middle East currently not having investments in private credit.
Invesco believed that the attractiveness of private credit is driven by diversification from traditional fixed income and its relative value compared to conventional debt.
The study says the US is the most attractive market for private credit, with the country rated as the preferred option by 67% of investment funds globally and 71% in the Middle East.
However, Invesco said there is growing interest in private debt in emerging markets as more than half of respondents, including 58% in the Middle East region, believe there are untapped opportunities in these countries.
“Private credit is increasingly attractive to sovereign wealth funds, many of which invest 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.
Implementing AI
Invesco also noted that more than a third of sovereign investors globally use advanced technologies such as artificial intelligence in their investment process.
The vast majority – 93% globally and 100% in the Middle East – believe AI will eventually play a role in their organization.
The rise of generative AI has led 66% of sovereign wealth funds and central banks globally and 83% in the Middle East to re-evaluate their current AI strategies and explore new applications for this technology.
The survey also found that half of these investors globally and 80% in the Middle East are confident that implementing AI can improve returns.
“Sovereign investors in the region are increasingly adopting AI in their investment processes, recognizing its potential to become an essential tool. While there are challenges, the funds are investing in training and partnerships to overcome barriers,” said Rizk.
The growing importance of ESG
Invesco said that investors who took part in the study consider greenwashing to be one of the biggest challenges, as mentioned by 84% of investment funds worldwide and 94% in the Middle East.
The report also found that sovereign investors are moving towards greater responsibility, with 50% of accounts in the Middle East shaping and tracking their portfolios to combat climate change.
“ESG (environmental, social and governance) adoption continues to grow among central banks in the Middle East, while SWFs 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. Their commitment and allocation is preferable to complete divestment to drive the energy transition.”
The allure of gold
The analysis showed that gold is gaining traction. Over the past three years, 70% of central banks in the Middle East region have increased their allocations to the yellow metal.
According to the report, central banks are consolidating and diversifying reserves, with 53 percent worldwide planning an increase in the size of their holdings and 52 percent planning further diversification.
Rising US debt levels have a negative impact on the dollar's global role, according to 64% of respondents globally and 33% 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 be weaker in five years.
“Amid global uncertainties, central banks in the region are consolidating and diversifying reserves. Gold's appeal is growing on concerns about rising US debt levels. Allocations to emerging markets are rising as central banks seek to boost yields and mitigate risks,” Rizk said.
In June, a survey by the World Gold Council noted that several 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% of central banks globally 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 bullish on the yellow metal,” Shaokai Fan, head of Central Banks at the World Gold Council, said at the time.
