Sovereign investors in the Middle East are exploring emerging markets as geopolitical tensions rise, study says
RIYADH: Middle Eastern sovereign investors are following their global peers in favoring India and other emerging markets amid concerns over geopolitical tensions, an analysis says.
In its latest report, Invesco, a US investment management firm, said that 88 percent of global investment funds, including 100 percent of Middle East funds, consider the South Asian country the most attractive place to invest among developing countries.
Saudi Arabia's sovereign wealth fund has already shown appetite in developing countries like India. In September 2023, the Kingdom's investment minister, Khalid Al-Falih, raised the possibility of setting up a sovereign wealth fund office in the Asian country, as well as investing in Indian startups serving Saudi markets through venture capital funds.
Commenting on her firm's report, Josette Rizk, head of the Middle East and Africa at Invesco, said: “In an unpredictable macro environment, sovereign investors are realigning their portfolios with a focus on equities, private credit and hedge funds.”
She added: “Emerging markets are gaining momentum and funds are taking a selective approach.”
According to the report, investment funds are looking to change their portfolios to reflect the new macro environment, with 27 percent and 50 percent in the Middle East planning to increase allocations to infrastructure over the next year.
Invesco's findings are based on the opinions of 140 chief investment officers, asset class managers and senior portfolio strategists at 83 sovereign wealth funds and 57 central banks, which together manage $22 trillion in assets.
Geopolitical tensions pose a risk to economic growth
The analysis found that 95 percent of sovereign investors in the Middle East region ranked geopolitical tensions as the most serious risk to economic growth over the next 12 months.
Inflation also remains a major concern for these investors, with 43 percent of sovereign wealth funds and central banks globally and 68 percent in the Middle East expecting inflation to exceed the top banks' targets, according to the report.
The study also notes 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 single digits over the long term, indicating a shift in expectations.
Growth of private credit
The report notes that private credit is also gaining in popularity, with only 35 percent of sovereign wealth funds globally and 22 percent in the Middle East currently not having investments in private credit.
Invesco suggested that the attractiveness of private credit is due to the diversification of traditional fixed income and its relative value compared to conventional debt.
The study says the US is the most attractive market for private lending, with the country considered the preferred option by 67 percent of investment funds globally and 71 percent in the Middle East.
However, Invesco notes that there is growing interest in private debt in emerging markets, as more than half of respondents, including 58 percent in the Middle East region, believe that there are untapped opportunities in these countries.
“Private credit is increasingly attractive to sovereign wealth funds, many of which invest through funds of funds and direct deals. Sovereign wealth funds in the region have developed markets but are also exploring emerging markets, 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 are using advanced technologies such as artificial intelligence in their investment process.
An overwhelming majority—93 percent globally and 100 percent in the Middle East—believe that artificial intelligence 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 review 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.
“Public investors in the region are increasingly using artificial intelligence in their investment processes, realizing its potential to become an important tool. Although challenges exist, funds are being invested in training and partnerships to overcome barriers,” Rizk said.
ESG is growing in importance
Invesco said investors it surveyed saw greenwashing as one of its biggest concerns, cited by 84 percent of investment funds globally and 94 percent in the Middle East.
The report also shows 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.
“Central banks in the Middle East continue to expand their adoption of ESG (environmental, social and governance), while SWFs refine their approach as the market matures,” Rizk said.
She added: “Investors are increasingly recognizing climate risk as a significant factor and aligning portfolios with global climate goals. Engaging with and allocating renewables is preferred over divestment to drive the energy transition.”
The allure of gold
The analysis showed 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 reserves, with 53 percent worldwide planning to increase the size of their holdings and 52 percent planning further diversification.
According to 64 percent of respondents worldwide and 33 percent of respondents in the Middle East, increasing US debt is negatively affecting the global role of the dollar.
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. Allocations to emerging markets are increasing as central banks seek to increase profitability and reduce risk,” Rizk said.
In June, a survey by the World Gold Council noted that more central banks plan to increase their gold reserves during the year, despite macroeconomic and political uncertainty and rising gold prices.
According to the WGC, 29 percent of central banks worldwide expect to increase gold holdings 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 remain bullish on the yellow metal,” Shaokai Fan, head of central banks at the World Gold Council, said at the time.
