Middle East Investors Explore Emerging Markets as Geopolitical Tensions Rise, Study Finds
RIYADH: Middle Eastern public investors are following global peers in focusing on India and other emerging markets amid concerns over geopolitical tensions, an analysis suggests.
In a recent report, US-based investment management firm Invesco said 88 percent of global sovereign wealth funds, including 100 percent of funds in the Middle East, considered South Asia to be the most attractive destination for investment in emerging economies.
Saudi Arabia's Public Investment Fund has already shown interest in developing countries such as India. In September 2023, Saudi Arabia's Minister of Investment 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 the Saudi market through a venture capital fund.
“In the face of an unpredictable macro environment, government investors are re-engaging their portfolios, shifting to stocks, private credit and hedge funds,” said Josette Rizk, Head of Middle East and Africa at Invesco. Commenting on the company’s report, the company said: “Amid an unpredictable macro environment, government investors are re-engaging their portfolios, shifting to stocks, private credit and hedge funds.”
“Emerging markets are gaining more attention, with funds taking a more selective approach,” she added.
The report said wealth funds are considering restructuring their portfolios to reflect the new macro environment, with 27 percent of funds and 50 percent of funds in the Middle East planning to increase allocations to infrastructure next year.
Invesco's research is based on the views of 140 chief investment officers, heads of asset classes and senior portfolio strategists at 83 sovereign wealth funds and 57 central banks, which together manage $22 trillion in assets.
Geopolitical tensions pose risks to economic growth
Analysis reveals 95 percent of public investors in the Middle East see geopolitical tensions as the most serious risk to economic growth over the next 12 months
Inflation remains a key concern for these investors, the report said, with 43 percent of sovereign wealth funds and central banks globally and 68 percent in the Middle East expecting inflation to be above the central bank's target.
The study also found that nearly three-quarters of investors, representing 71 percent globally and 70 percent in the Middle East, expect interest rates and bond yields to remain in the mid-single digits over the longer term, indicating a shift in expectations.
The rise of personal loans
Private credit is also on the rise, with only 35 percent of sovereign wealth funds globally and 22 percent in the Middle East currently holding no investments in private credit, the report says.
Invesco said the attractiveness of private credit stems from its diversification from traditional fixed income and its relative value to general debt.
The study found that the US was the most attractive market for private sector loans, with the country ranked as the preferred choice by 67 percent of sovereign wealth funds globally and 71 percent in the Middle East.
However, Invesco said there was growing interest in emerging market private debt, as more than half of respondents, including 58 percent in the Middle East, believed there were untapped opportunities in these countries.
“Private credit is increasingly attractive to sovereign wealth funds, most of which invest via direct funds and deals. Developed market sovereign wealth funds in the region are exploring emerging markets while balancing defensive and opportunistic strategies to navigate the competitive landscape,” Rizk added.
AI adoption
Invesco also noted that more than a third of private investors worldwide use advanced technologies such as artificial intelligence in their investment processes.
A majority — 93 percent globally and 100 percent in the Middle East — believe AI will eventually play a role in their organization.
The rise of creative AI has led 66 percent of sovereign wealth funds and central banks globally and 83 percent in the Middle East to reassess their current AI strategies and explore new uses for the technology.
The survey also found that half of investors globally and 80 percent in the Middle East are confident that AI adoption will boost returns.
“Country investors in the region are increasingly embracing AI in their investment processes, recognizing its potential as a key tool. Despite the challenges, funds are investing in training and building partnerships to overcome the hurdles,” Rizk said.
The increasing importance of ESG
Invesco said investors who participated in the study saw greenwashing as one of the biggest challenges, as indicated by 84 percent of sovereign wealth funds globally and 94 percent in the Middle East.
The report also found that sovereign investors are moving towards greater responsibility, with 50 percent of Middle Eastern accounts modeling and monitoring their portfolios to combat climate change.
“ESG (environmental, social and governance) adoption continues to increase among Middle Eastern central banks as SWFs refine their approaches in line with market maturity,” Rizk said.
“Investors are increasingly recognizing that climate risk is a key driver 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,” she added.
The allure of gold
The analysis found that gold is becoming more popular. Over the past three years, 70% of central banks in the Middle East have increased their allocation to gold.
The report said central banks are strengthening and diversifying their reserves, with 53 percent of central banks globally planning to increase the size of their holdings and 52 percent planning to further diversify.
Rising U.S. debt levels are having a negative impact on the dollar's global role, according to 64 percent of respondents globally and 33 percent in the Middle East.
Some 18 percent of central banks, including 20 percent in the Middle East, believe the US dollar's status as the global reserve currency will weaken within five years.
“Amid global uncertainty, regional central banks are strengthening and diversifying their reserves. Gold has become more popular due to concerns about rising US debt levels. Allocations to emerging markets are increasing as central banks look to boost yields and reduce risk,” Rizk said.
In June, a survey conducted by the World Gold Council found that many central banks planned to increase their gold reserves within a year, despite macroeconomic and political uncertainty and rising gold prices.
According to the WGC report, 29 percent of central banks worldwide expect to increase their gold reserves in the next 12 months, the highest level since the first survey in 2018.
“Despite record demand from the official sector over the past two years and rising gold prices, many reserve managers remain interested in the yellow metal,” Shaokai Fan, head of central banks at the World Gold Council, said at the time.
