Sovereign wealth funds in the Middle East plan to use their cash reserves to take advantage of buying opportunities as asset valuations plunge due to COVID-19 induced market turmoil.
In its annual Global Sovereign Asset Management Report, investment manager Invesco said that state-controlled investment funds are keen to invest in fixed income assets, especially in alternative asset classes and infrastructure projects.
The report surveyed 139 chief investment officers, heads of asset classes and senior portfolio strategists from 83 sovereign funds and 56 central banks, who manage a total of $19 trillion (Dh69.8tn) in assets, the US company said.
Europe is a preferred destination for bargain-seeking Middle Eastern investors.
Around 38% of the regional funds surveyed said they were looking to increase their exposure to emerging Europe while the same percentage said they were exploring deals in developed Europe.
“The market turmoil in March and April saw asset prices fall considerably, especially as some investors sold securities to ensure liquidity,” Zainab Kufaishi, head of the Middle East and Africa department at Invesco, said.
The International Monetary Fund expects the global economy this year to contract 4.9% before a slow rebound next year.
As a result of the decline driven by a coronavirus, the world economy, which faces its deepest recession since the Great Depression, is expected to lose more than $12 trillion in 2020 and 2021.
Regional sovereign wealth funds are now preferring debt as an asset class over equities and 57% are planning to increase their investment in fixed income assets over the next 12 months, said Invesco.
“Traditionally, fixed income is seen as a defensive anchor and this was tested by the crisis, with even US government debt caught up in a broad sell-off as investors rushed into cash,” Rod Ringrow, head of official institutions at Invesco, said.
Regional fund managers said they’re planning to expand their allocations to alternative investment in fixed income and many have formed internal teams to manage those strategies.
Less than eight out of 10 have property debt shares, 71% for infrastructure debt and 71% for asset-backed securities or structured loans, the study said.
Emerging-market debt also has a wide appeal among regional investors, with 71% of respondents reporting exposure to emerging-market debt.
“We see investors looking at less traditional credit assets such as emerging market debt as they look for portfolio diversification to boost returns,” said Ms Kufaishi.
Emerging markets have become better developed and more accessible, which is driving increased interest.”
In 2019, 75% of sovereign funds in the Middle East outperformed their targets but exhibited caution even before markets were affected by COVID-19.
This year, central banks and a limited but significant community of global sovereign investors boosted their allocations to gold.
On average, 4.8 % of total assets of central bank reserves are in gold – up from 4.2 % in 2019 – with nearly half of central banks citing a potential to offset negative debt yielding as a primary gain, the report said.
