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Mon 13 Jun 2016 02:46 PM

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Confidence among MidEast SWFs 'stable' despite oil price slump

Invesco Global Sovereign Asset Management Study shows US is most attractive destination for investments

Confidence among MidEast SWFs 'stable' despite oil price slump

Middle East sovereign investor confidence is stable and funds from the region continue to pursue long-term investment goals despite continued market volatility and the sustained low oil price, according to a new report by Invesco.

Its fourth annual Invesco Global Sovereign Asset Management Study showed that this year there is a strong preference for the US above other geographical regions and an increased appetite for real estate investment.

The study indicated that overall Middle East sovereign investor confidence remained stable - and has done since 2013.

Alex Millar, head of Invesco EMEA sovereigns & Middle East and Africa institutional sales, said: “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. Many of these institutions appear confident in their funding outlook and are increasing the importance of their investment objectives relative to their short-term liquidity needs.”  

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 fallen1, Middle East sovereign investors remain better prepared in terms of investment capability and governance, the report said.

On average new funding accounted for 3 percent of assets, while the average sovereign investor withdrew or cancelled only 7 percent of assets, as sovereigns cope with funding challenges, Invesco added. 

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.

According to the report, 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, with investors from the region remaining bullish on future opportunities in the US, and in US infrastructure in particular.

New allocations to frontier markets are also on the rise, with Middle East allocations to emerging Asia increasing from 1.5 percent in 2014 to 2.3 percent in 2015, and in Africa from 1 percent to 2.6 percent, Invesco said.

Conversely, the BRIC markets - Brazil, Russia, and China - have all lost their attractiveness to Middle East sovereign investors amid weaker performance, with only India becoming increasingly attractive.

Invesco said that while Middle East sovereign investors have focused on increasing allocations to infrastructure and private equity over the last two years, in 2016 fewer expect to increase allocations to these asset classes.

However, allocations to real estate have risen significantly, from 5.9 percent in 2013 to 9.8 percent in 2015, with this figure expected to rise further in 2016. 

Millar said: “While the challenges facing sovereign investors since the start of this period of oil price volatility have clearly not gone unnoticed, and returns have been affected, confidence among global sovereign investors is relatively high.”

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