Middle East sovereign investors are exploring emerging markets as geopolitical tensions rise, study says
RIYADH: Middle East sovereign investors are following their global counterparts in prioritizing India and other emerging markets amid concerns over geopolitical tensions, an analysis said.
In its latest report, Invesco, a US-based investment management firm, said 88 percent of global wealth funds, including 100 percent 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 establishing a sovereign wealth fund office in the Asian country, as well as investing in Indian startups targeting the Saudi markets via venture capital funds.
Josette Rizk, head of the Middle East and Africa at Invesco, commented on her firm's report: “Amidst an unpredictable macro environment, sovereign investors are recalibrating their portfolios and turning to equities, private credit and hedge funds.”
She added: “Emerging markets are gaining traction, with funds adopting a selective approach.”
According to the report, wealth 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 over the next year.
Invesco's results are based on the views of 140 investment managers, asset class managers and senior portfolio strategists at 83 sovereign wealth funds and 57 central banks, which collectively manage $22 trillion in assets.
Geopolitical tensions that pose risks to economic growth
The analysis revealed that 95 percent of sovereign investors in the Middle East region considered geopolitical tension 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 percent of sovereign wealth funds and central banks globally and 68 percent in the Middle East expecting it to run above the top banks' targets.
The study further noted that nearly three-quarters of investors – 71 percent worldwide and 70 percent in the Middle East – expect interest rates and bond yields to remain in mid-range over the long term, indicating a shift in expectations.
The increase in private credit
The report noted that private credit is also gaining popularity, with only 35 percent of sovereign wealth funds globally and 22 percent in the Middle East currently having no investments in private credit.
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 US is the most attractive market for private credit, with the country ranked as the preferred option by 67 percent of wealth funds globally and 71 percent 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 percent in the Middle East region, believe there are unexplored opportunities in these countries.
“Private credit is becoming increasingly attractive to sovereign wealth funds, with many investing through funds of funds and direct deals. Sovereign wealth funds in the region are developing markets but are also exploring emerging markets while 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 use advanced technology such as artificial intelligence in their investment process.
The vast majority – 93 percent worldwide 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 reevaluate their current AI strategies and explore new applications for this technology.
The survey also showed that half of these investors globally and 80 percent in the Middle East are convinced that the implementation of AI can increase returns.
“Sovereign investors in the region are increasingly embracing AI in their investment processes and recognizing its potential to become an important tool. While there are challenges, funds are investing in education and partnerships to overcome barriers,” said Rizk.
Growing importance of ESG
Invesco said investors who participated in the study consider greenwashing to be one of the biggest challenges, cited by 84 percent of wealth funds worldwide and 94 percent in the Middle East.
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 increase among Middle East central banks, while SWFs are refining 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. Engagement with and allocation to renewable energy is preferred over full divestment to drive the energy transition.”
The allure of gold
The analysis showed that gold is starting to attract. Over the past three years, 70 percent of the central banks in the Middle East region have increased allocations to the yellow metal.
According to the report, central banks are strengthening 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 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 US dollar's position as the world 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 due to concerns over rising US debt levels. Allocation to emerging markets is increasing as central banks seek to improve yields and reduce risks,” said Rizk.
In June, a survey by the World Gold Council noted that more central banks plan to increase their gold reserves within a year despite ongoing macroeconomic and political uncertainty and rising gold prices.
According to the WGC, 29 percent 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 enthusiastic about the yellow metal,” Shaokai Fan, head of central banks at the World Gold Council, said at the time.
