Middle East investors revisiting asset allocation amid inflation concerns
Rising inflation and the recent Ukrainian invasion by Russia are prompting investors in the Middle East to reexamine their asset allocation, according to the latest Invesco Global Sovereign Asset Management Study report.
According to the report, 55 percent of the sovereigns in the Middle East region have repositioned their portfolios in anticipation of further rate rises, though the sharp correction in equities and failure of bonds to shelter portfolios have presented difficult choices.
“Inflation is surging, global growth is slowing and geopolitical tensions are rising. The macro environment is now more uncertain, sending sovereigns to rethink how to position their portfolios as they look ahead,” said Zainab Faisal Kufaishi, head of the Middle East and Africa and senior executive at Invesco.
The study report, which detailed the views of 139 chief investment officers, suggested that global sovereigns’ fixed income allocations have declined steadily in recent years as most of them are going to private market alternatives, notably real estate, private equity and infrastructure.
Some 82 percent of the respondents said that real estate assets are effective hedges against inflation and higher yields.
According to the report, interest in private assets continues with 50 percent of sovereign wealth funds in the Middle East, citing an intention to increase allocations to private equity, 20 percent to real estate and 20 percent to infrastructure over the next 12 months.
The report further noted that private assets now constitute, on average, 22 percent of sovereigns’ portfolios globally. Invesco added that sovereign investors now own $719 billion in private assets, up from $205 billion in 2011.
“While many are looking to private markets for solutions, we should not overstate the pace of this shift. As long-term investors, sovereigns are treading very carefully, and many are making only incremental changes to their portfolios, adopting a ‘wait and see’ approach,” said Rod Ringrow, head of official institutions at Invesco.
Following the Ukrainian invasion, most of the sovereigns in the Middle East have lost their affinity toward Europe.
According to the study report, 40 percent of Middle East sovereigns plan to reduce allocations to developed Europe and 30 percent to Emerging Europe over the next 12 months.
The report added that these respondents are most likely to increase their exposure to North America, Asia-Pacific and the Middle East.
According to 52 percent of the investors, China has become a challenging place to invest this year due to regulatory risks and government interventions.
The report added that sovereign funds do not see digital assets as investable, as just 20 percent of these respondents believe that digital assets have a role in asset allocation as a diversifier.
According to the report, only 7 percent of global sovereign investors have any exposure to digital assets through investments in underlying blockchain companies.
Some 70 percent of Middle East sovereigns have more interest in investing in companies involved in the infrastructure behind digital assets than investing in digital assets themselves.
Research on digital assets, however, is improving. In 2018, 12 percent of the global sovereigns were conducting research in the digital assets sector, and in 2022, it has grown to 41 percent, including 40 percent of sovereigns from the Middle East.
According to the report, 71 percent of the Middle East central banks are either researching Central Bank Digital Currencies or considering launching one themselves.