Middle Eastern investors review asset allocation amid inflation fears

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RIYADH: Rising inflation and Russia’s recent Ukrainian invasion are prompting Middle Eastern investors to re-examine their asset allocation, according to the latest Invesco Global Sovereign Asset Management Study report.

According to the report, 55% of sovereigns in the Middle East region repositioned their portfolios in anticipation of further rate hikes, although the sharp correction in equities and the inability of bonds to protect portfolios presented tough choices.

“Inflation is rising, global growth is slowing and geopolitical tensions are rising. The macroeconomic environment is now more uncertain, forcing sovereigns to rethink how to position their portfolios going forward,” said Zainab Faisal Kufaishi, Head of Middle East and Africa and Senior Executive at Invesco.

The research report, which details the views of 139 chief investment officers, suggests global sovereign fixed income allocations have declined steadily in recent years, with most turning to market alternatives private sector, including real estate, private equity and infrastructure.

Some 82% of respondents said real estate assets are effective hedges against inflation and rising yields.

According to the report, interest in private assets continues with 50% of sovereign wealth funds in the Middle East, citing an intention to increase allocations to private equity, 20% to real estate and 20% to infrastructure over the course of the year. of the next 12 months.

The report further notes that private assets now constitute, on average, 22% of sovereign portfolios globally. Invesco added that sovereign investors now hold $719 billion in private assets, up from $205 billion in 2011.

“While many are looking to private markets for solutions, we should not overestimate the pace of this change. As long-term investors, sovereigns are acting very cautiously, and many are only making incremental changes to their portfolios, adopting a ‘wait and see’ approach,” said Rod Ringrow, head of official institutions at Investco.

Following the Ukrainian invasion, most rulers of the Middle East lost their affinity with Europe.

According to the research report, 40% of Middle Eastern sovereigns plan to reduce their allocations to developed Europe and 30% to emerging Europe over the next 12 months.

The report adds that these respondents are the most likely to increase their exposure to North America, Asia-Pacific and the Middle East.

According to 52% of investors, China has become a difficult place to invest this year due to regulatory risks and government interventions.

The report adds that sovereign wealth funds do not view digital assets as investable, as only 20% of these respondents believe digital assets play a role in asset allocation as diversifiers.

According to the report, only 7% of global sovereign investors have exposure to digital assets through investments in underlying blockchain companies.

Some 70% of Middle Eastern sovereigns have more incentive to invest in companies involved in the infrastructure behind digital assets than to invest in the digital assets themselves.

Research on digital assets, however, is improving. In 2018, 12% of global sovereigns conducted research in the digital asset sector, and in 2022 that figure rose to 41%, including 40% of Middle Eastern sovereigns.

According to the report, 71% of central banks in the Middle East are researching central bank digital currencies or considering launching one themselves.

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