The study shows that independent investors in the Middle East are exploring emerging markets as geopolitical tensions rise.
RIYADH: Middle East independent investors are following their global counterparts in prioritizing India and other emerging markets amid concerns about geopolitical tensions.
Inosco, a US-based investment management company, announced in its latest report that 88 percent of global wealth funds, including 100 percent of wealth funds in the Middle East region, made the South Asian country the most attractive destination for investment. They know among emerging economies.
Saudi Arabia's public investment fund has already expressed its appetite in emerging countries such as India. In September 2023, Khalid al-Falih, the kingdom's investment minister, expressed the possibility of setting up an independent investment fund office in the Asian country, as well as investing in Indian startups that will market to Saudi markets through venture capital funds.
Commenting on her firm's report, Josette Rizk, head of the Middle East and Africa at Invesco, said: “Amidst an unpredictable macro environment, public sector investors are realigning their portfolios, turning to equities, private equity and hedge funds. “
He added: “Emerging markets are increasing 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 infrastructure allocations in the coming year.
Invesco's findings are 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 collectively manage $22 trillion in assets.
Geopolitical tensions create risks for economic growth
This analysis showed that 95% of independent investors in the Middle East region consider geopolitical tension to be the most serious risk to economic growth over the next 12 months.
According to the report, inflation remains a major concern for these investors, with 43 percent of sovereign wealth funds and central banks globally and 68 percent in the Middle East expecting inflation to be above the top banks' targets.
The study also noted that nearly three-quarters of investors — 71 percent globally and 70 percent in the Middle East — expect interest rates and bond yields to remain in the single digits over the long term, indicating a shift in expectations.
Increasing private credit
Private credit is also on the rise, the report noted, with only 35 percent of sovereign wealth funds globally and 22 percent in the Middle East currently having no investment in private credit.
Invesco believes that the appeal of private credit is due to its diversity in traditional fixed income and its relative value compared to conventional debt.
The study found that the United States is the most attractive market for private equity, with the country considered 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 undiscovered opportunities in these countries.
Private equity is increasingly attractive to sovereign wealth funds, with many investing through funds and direct deals. Independent investment funds in the region own developed markets but are also exploring emerging markets while balancing defensive and opportunistic strategies to navigate the competitive landscape, Rizek added.
Implementation of artificial intelligence
Invesco also noted that more than a third of independent investors worldwide use advanced technologies such as artificial intelligence in their investment process.
The vast majority – 93% worldwide and 100% in the Middle East – believe that AI will eventually play a role in their organization.
The emergence of generative AI has caused 66% of sovereign wealth funds and central banks globally and 83% in the Middle East to re-evaluate their current AI strategies and explore new uses of this technology.
The survey also found that half of these investors globally and 80% in the Middle East are confident that implementing AI can increase returns.
“Independent investors in the region are increasingly using AI in their investment processes and recognize its potential to become an indispensable tool. While challenges remain, funds are investing In education and participation are to overcome obstacles.
The growing importance of ESG
Invesco said investors who took part in the study saw greenwashing as one of the biggest challenges, as cited by 84% of wealth funds worldwide and 94% in the Middle East.
The report also found that independent investors are moving to be more responsible, with 50 percent of Middle East accounts modeling and tracking their portfolios to address climate change.
“ESG (environmental, social, and governance) adoption continues to grow among central banks in the Middle East, while SWFs refine their approach as the market matures,” Rizek said.
He added: “Investors are increasingly recognizing climate risk as a material factor and are aligning portfolios with global climate goals.” “Participation and allocation to renewable energy is preferable to full transfer to energy transmission.”
The charm of gold
Analysis showed that gold is rising. In the last three years, 70% of the central banks in the Middle East region have increased the allocation of the yellow metal.
According to the report, central banks are strengthening and diversifying reserves, with 53 percent worldwide planning to increase the size of their holdings and 52 percent planning to further diversify.
According to 64% of respondents globally and 33% in the Middle East, increasing US debt levels have a negative impact on the global role of the dollar.
About 18 percent of central banks, including 20 percent in the Middle East, believe the US dollar's position as the global reserve currency will weaken within five years.
Amid global uncertainties, central banks in the region are strengthening and diversifying reserves. Gold's appeal is on the rise due to concerns about rising US debt levels. Allocations to emerging markets are increasing as central banks seek to increase returns and reduce risk, Rizek said.
In June, a survey by the World Gold Council showed that more central banks plan to increase their gold reserves within a year, despite macroeconomic and political uncertainties and rising gold prices.
According to the WGC, 29 percent of central banks globally expect to increase their gold reserves in the next twelve months, the highest level since the survey began in 2018.
Shaokai Fan, head of central banks at the World Gold Council, said at the time: “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.”
