Quick Take:

• Eighty-eight percent of Middle East investors have exposure to China

• Political risk drives sovereigns away from Europe

• Sovereign investors move to fixed income after a challenging 2018

• Increasing allocations to illiquid alternatives is prominent for sovereigns based in the Middle East

• Middle East sovereigns look to technology sector for returns

• ESG1 considerations increase in both sovereigns and Central Banks

Invesco’s latest study on investment behaviour of sovereign wealth funds and central banks show that the Middle East is increasingly disenchanted with Europe with an increased interest in emerging markets, particularly China. Invesco’s Global Sovereign Asset Management Study, found that 88% of investors in the Middle East have exposure to China, versus 73% for all investors globally.

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The study was conducted amongst 139 individual sovereign investors and central bank reserve managers across the globe representing $20.3trillion of assets, of which 71 are central banks, reflecting their growing status as sovereign investors.

Sovereigns optimistic on China

China’s attractiveness rating for sovereign investors has improved more than any other major region since 2017, with equities continuing to be the asset class most favoured. 

100% of sovereigns in the Middle East with China exposure held Chinese equities. Middle East respondents, stated the study, focused on building their expertise in China by investing in partnerships, developing in-house proficiency and setting up dedicated Asian offices.  

Investment risk is the biggest challenge of investing in China for Middle East sovereigns while transparency remains an obstacle to higher allocations in China for global sovereigns. For those sovereigns with no existing allocation to China, investment restrictions and currency risk are seen as the main impediments.

Obstacles to investing in China Sovereigns only (% citations)

Middle East investors are increasing allocations to Asia as a region, with 75% having increased allocations in 2018 compared with 47% for all investors surveyed. This trend is expected to continue in 2019.

Investors don’t see economic attractiveness in Europe

A combination of slowing economic growth and perceptions of rising political risk have led to a decline in the perceived attractiveness of major European economies. According to the study, Brexit is now influencing asset allocation decisions for 64% of all sovereigns, though this is higher in the region with 78%.

Continental Europe is seen as increasingly uncertain with the ascendance of populist movements in major European economies such as Germany and Italy, and is impacting asset allocation decisions for 46% of all respondents.

This has resulted in Europe falling out of favour, with half of the sovereign investors in the Middle East decreasing allocations to Europe in 2018 and a similar number planning further decreases in 2019.

Only 13% of global sovereigns plan on increasing allocations to Europe this year, compared to a 40% allocation to Asia and 36% to Emerging Markets

Macroeconomic themes influencing asset allocation decisions. Sovereigns only (%citations)

Middle East sovereigns lead as technology investors and adopters

Sovereigns in the Middle East recognize technology as a large and broad-based investment opportunity, with 89% of Middle East sovereigns having a dedicated technology portfolio or team, compared with 48% globally.

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In 2015, the UAE announced a US$80 billion investment plan in the Emirates Science Technology and Innovation Higher Policy, and Saudi Arabia has made technological innovation central to its Vision 2030.

According to the survey, 100% of the respondents in the Middle East have implemented technology innovation in the investment strategy space in the last 12 months, in areas such as risk management, monitoring, and artificial intelligence.

Insights from Ivesco

According to Josette Rizk, Client Director, Institutional Sales, Invesco Middle East and Africa, “We are observing an interesting shift in terms of both geographic and sector allocation from the Middle East. The need to balance global exposure is leading many of the regional investors to explore opportunities in emerging markets and Asia, especially due to the attractive emerging market fundamentals and valuations. Whilst increasing allocation to China remains on the radar for regional investors, investment risk is seen as the biggest challenge to investing in the country.”

“Another interesting trend we have observed is that technology and innovation is becoming an important part of their overall portfolio. This is primarily driven by attractive returns that tech companies offer and is also aligned with the agendas of many of the regional governments, particularly of the UAE and Saudi Arabia, who want to ultimately develop a knowledge economy to drive economic development in their countries.”

“Finally, the conversation around ESG or responsible investing has picked up momentum.
Much of this has been driven by large institutional investors in the region, and in particular by the sovereign wealth funds, notably on core themes that have an impact on sustainability and the signing of the One Planet Initiative.”