Dubai: Middle East sovereign investors are well prepared to manage funding challenges arising out of steep fall in oil prices and potential withdrawals resulting from domestic economic compulsions, according to Global Sovereign Asset Management Study by Invesco.
“Funding is an issue for certain oil-rich sovereigns globally. Our study shows that the Middle East sovereign investors are better prepared to meet the sharp fall in oil prices than in the past although they could face increased withdrawal risks if the oil prices were to remain below $40 (Dh146) per barrel for more than two years,” Nick Tolchard, Chair of Invesco’s Global Sovereign Group & Head of Invesco Middle East, said.
Invesco Global Sovereign Asset Management Study was conducted among more than 50 individual sovereign investors across the globe representing $7.09 trillion of assets, including Middle East-based sovereign wealth funds.
The study took place when the oil price hovered around $50 a barrel and shows how it is impacting the future funding scenario and investment strategies of sovereign investors around the world.
Surprisingly, the views of Middle Eastern investors showed higher resilience to fund withdrawal risks due to low oil prices while their North American counterparts viewed higher risk of withdrawals, with 80 per cent viewing potential withdrawals.
“It shows the maturity of Middle East sovereign investors compared to many of their global counterparts. They have been around for [a] long time and have been through different cycles of oil volatility and are better prepared this time to deal with it,” said Alexander Millar, Head of Institutional Business, Invesco Middle East.
For the rest for the world, a much lower but still significant 42 per cent of those sovereigns with high oil exposure expect a decrease in funding relative to last year, which shows that the link between sovereign funding and oil is global and not just an issue for oil-driven sovereign investors in emerging markets.
In terms of investment objectives, the study showed that Middle Eastern investors have the highest return objective and the longest investment horizons. “Middle East region placed the highest importance on investment objectives, overtaking the Western sovereigns. Similarly, the Middle East sovereigns had the highest average target returns and the longest time horizons at an average of 7.8 years,” said Tolchard.
Some respondents expressed concern that the fall in oil price may result in a short-term reversal to more conservative investment strategies and defer the implementation of more progressive long-term allocation trends towards alternatives. Despite this, it remains clear that sovereign investors feel they are in a much stronger position to deal with the impact of falling oil prices this year than they would have been in 2008.
“Sovereign investors are certainly better placed now than they were [before] the 2008 global financial crisis, with various improvements including greater recognition of liquidity objectives across the board, a better risk management and governance framework to cope with these scenarios, and improved management information on liquidity and an understanding of how best to liquidate asset[s],” said Tolchard.
