Despite challenging external environment, sovereign investor confidence in the Middle East – a region that is home for more than 40 per cent of the world’s sovereign wealth funds with a combined value of over $7 trillion – is stable as SWFs continue to pursue long-term investment goals through strategic asset allocation.

“While the challenging macro-economic environment, driven by the sustained low oil price, has impacted on global sovereign investment performance, with average annual portfolio returns having fallen, Middle East sovereign investors remain better prepared in terms of investment capability and governance,” a report on the complex investment behaviour of sovereign wealth funds and central banks said. “On average new funding accounted for three per cent of assets, while the average sovereign investor withdrew or cancelled only seven per cent of assets, as sovereigns cope with funding challenges,” said Alex Millar, head of Invesco EMEA sovereigns & Middle East and Africa institutional sales, who released the report.

According to Invesco Global Sovereign Asset Management Study – which is based on a study among 77 individual sovereign investors and reserve managers across the globe and representing 66 per cent of sovereign assets and 25 per cent of foreign reserves totalling $8.96 trillion of assets – there is a strong preference among SWFs for the US above other geographical regions and an increased appetite for real estate investment to drive allocations towards alternatives.

Time horizons for investing are also lengthening as Middle East sovereign investors manage these challenges, rising from 7.1 to 7.7 years over the past four years amid continued interest in the diversification benefits and illiquidity premiums offered via alternatives. The study indicates that overall Middle East sovereign investor confidence remains stable – and has done since 2013 – with Invesco’s Sovereign Confidence Index highlighting that overall confidence has remained steady at 7.2 in 2014, to 7.3 in 2016.

While the UK had previously emerged as the preferred developed market for global sovereign investment, the US has taken the lead in 2016. For the Middle East sovereigns the position has been more stable with the US being the preferred market since 2014. Scoring a rating of 8.2 (out of ten) in attractiveness to sovereign investors in 2014, this has risen to 8.3 in 2016 – compared to a slightly lower 7.1 rating in 2016 for the UK. Middle East sovereign investors also remain bullish on future opportunities in the US, and in US infrastructure in particular.

“Many sovereign investors are now comfortable operating in an environment with limited new funding. Some have ceded assets to governments without cancelling long-term investments, while others have not been called upon at all for withdrawals over the last 12 months,” Millar said at a media briefing.

Sovereign investors globally expressed the view that the US appears increasingly open to their investments following positive perceptions of sovereign investments into the US financial sector during the global financial crisis.

Middle East sovereign investors have focused on increasing allocations to infrastructure and private equity over the last two years; however attitudes have changed in 2016, and for the first time fewer sovereign investors expect to increase allocations to these asset classes.

“While allocations to infrastructure and private equity have increased over the last three years, total allocations remain low. From 2013 to 2015, Middle East sovereign investors’ average total portfolio assets to infrastructure increased from 0.3 per cent to 2.5 per cent, while private equity rose from 5.2 per cent to 5.5 per cent of the Middle East average sovereign portfolio.

“Conversely, their allocations to real estate have risen significantly, from 5.9 per cent in 2013 to 9.8 per cent in 2015,” said the report.

New allocations to frontier markets are also on the rise, with Middle East allocations to emerging Asia increasing from 1.5 per cent in 2014 to 2.3 per cent in 2015, and in Africa from 1.0 per cent to 2.6 per cent. Conversely, the BRIC markets – Brazil, Russia, India and China – have all lost their attractiveness to Middle East sovereign investors amid weaker performance, with only India becoming increasingly attractive.

Issac John / Dubai ; Khaleej Times ; June 15, 2016