As geopolitical tensions rise, sovereign investors in the Middle East are exploring emerging markets, research finds.
RIYADH: Amid concerns over geopolitical tensions, national investors in the Middle East are following the lead of global investors by prioritizing India and other emerging markets, according to an analysis.
In its latest report, Invesco, an American investment management firm, said 88% of global wealth funds, including 100% in the Middle East, view South Asian countries as the most attractive investment destination among emerging economies.
Saudi Arabia’s Public Investment Fund has already expressed its desire for emerging markets like India. In September 2023, Saudi Arabia’s Minister of Investment Khalid Al-Falih announced the opening of a public debt fund office in the Asian country and the potential for investment in Indian startups targeting the Saudi market through a venture capital fund.
Josette Rizk, Invesco’s head of Middle East and Africa, said in a statement that the firm’s report: “In a macro environment that is unpredictable, sovereign investors are rebalancing their portfolios and turning to equities, private equity and hedge funds.”
“Emerging markets are gaining popularity and funds are adopting a selective approach,” she added.
According to the report, wealth funds plan to rebalance their portfolios to reflect the new macroeconomic environment, with 27% and 50% in the Middle East planning to increase their allocation to infrastructure in the next year.
Invesco's findings are based on the views of 140 chief investment officers, heads of asset classes and chief portfolio strategists across 83 sovereign wealth funds and 57 central banks, who collectively manage $22 trillion in assets.
Geopolitical tensions pose risks to economic growth
Our analysis found that 95% of investors in countries across the Middle East see geopolitical tensions as the most serious risk to economic growth over the next 12 months.
Inflation is also a major concern for these investors, with 43% of sovereign funds and central banks worldwide and 68% in the Middle East expecting inflation to be higher than the top banks' targets, according to the report.
The study also noted a shift in expectations, with nearly three-quarters of investors (71% globally and 70% in the Middle East) expecting interest rates and bond yields to remain in the mid-single digits in the long term.
Increase in private credit
The report also found that private credit is gaining popularity, with only 35% of sovereign wealth funds worldwide and 22% in the Middle East not currently invested in private credit.
Invesco said the appeal of private credit stems from its diversification from traditional fixed income and its relative high valuation compared to existing debt.
According to the study, the US is the most attractive market for private credit, with 67% of wealth funds globally and 71% in the Middle East rating the US as their preferred option.
However, Invesco said interest in emerging market debt is growing, with more than half of respondents, including 58% in the Middle East, believing there are untapped opportunities in these countries.
“Private credit is becoming increasingly attractive to sovereign wealth funds, with many investing directly with the funds. While sovereign wealth funds in the region have explored developed markets, they are also exploring emerging markets while balancing defensive and opportunistic strategies to navigate the competitive environment,” Rizk added.
Implementation of AI
Invesco also found that more than a third of national investors worldwide are using cutting-edge technologies such as artificial intelligence in their investment processes.
A whopping 93% globally and 100% in the Middle East believe that AI will eventually play a role in their organizations.
The advent of generative AI has caused 66% of sovereign wealth funds and central banks worldwide, and 83% in the Middle East, to reassess their current AI strategies and explore new applications for the technology.
Research shows that half of global investors and 80% of Middle Eastern investors are confident that AI implementation will improve returns.
“Sovereign investors in the region are increasingly embracing AI in their investment processes and recognizing the potential for AI to be an essential tool. While there are challenges, the fund is investing in education and partnerships to overcome the barriers,” Rizk said.
The growing importance of ESG
Invesco said 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 citing it.
The report also found that national investors are moving toward greater accountability, with 50% of accounts in the Middle East modelling and tracking their portfolios to address climate change.
“There is a continued increase in the adoption of ESG (environmental, social and governance) among central banks in the Middle East, and SWFs are evolving their approaches as the market matures,” Rizk said.
She added: “Investors are recognising climate risk as a key factor and are aligning their portfolios with global climate goals. Participation and allocation to renewable energy are preferred over outright divestment to drive the energy transition.”
The charm of gold
Analysis shows that gold is gaining traction: 70% of central banks in the Middle East have increased their allocations to gold over the past three years.
According to the report, central banks are increasing and diversifying their reserves, with 53% of central banks worldwide planning to increase the size of their asset holdings and 52% planning further diversification.
According to 64% of global respondents and 33% of Middle Eastern respondents, rising U.S. debt levels would have a negative impact on the dollar's global role.
About 18% of central bankers, including 20% 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 their reserves. Concerns about rising U.S. debt levels are making gold more attractive. Allocations to emerging markets are increasing as central banks seek to boost yields and mitigate risk,” Rizk said.
A survey conducted by the World Gold Council in June found that despite ongoing macroeconomic and political uncertainty and rising gold prices, more central banks plan to increase their gold holdings in the coming year.
According to the WGC, 29% of central banks worldwide expect to increase their gold holdings 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 the rise in gold prices, many reserve managers are still enthusiastic about this gold,” said Xiaokai Fan, who was then head of the World Gold Council's central bank.
