Dubai: More money from the Middle East is likely flow into the emerging markets as sovereign investors expect new state funding and prefer to invest abroad, a new study suggests.
The second annual Invesco Global Sovereign Asset Management Study, an in-depth report that looks into the behaviour of sovereign investors across the globe, found that more than half (54 per cent) of the region’s sovereign wealth funds (SWFs), expect to get more money from the government this year than they did a year ago.
SWFs are pools of surplus money or savings that often cash-rich countries allocate for investments in various assets as a way to diversify revenue streams. As of 2012, the asset value of four UAE sovereign wealth funds accounted for a little over $800 billion.
Invesco’s study found that countries outside the developed markets, including Latin America, Africa and China, are the preferred destination of new capital inflow from the Middle East sovereigns and other counterparts globally. Among the asset classes, alternative investments appear to be the most preferred, particularly real estate, private equity and infrastructure.
“We’re seeing an increasing new funding this year. It shows that there’s more confidence in giving these funds money to invest [outside rather than within the region], and as we come out of the financial crisis, there’s more confidence in passing the money over,” said Nick Tolchard, head of Invesco Middle East, during a round-table discussion with reporters yesterday.
In the last two years, governments in the region pumped money into the local economy on the back of Arab Spring to create more jobs and build new infrastructure, among others. “The big change now is that they’re giving the money to the SWFs to deploy it,” Tolchard, who is also the co-chair of Invesco’s Global Sovereign Group, added.
Invesco’s study was conducted among more than 50 individual sovereign investors across the globe, representing $5.7 trillion worth of assets. In the Middle East, the number of respondents anticipating an increase in allocation to private equity has gone up from 60 per cent last year to 83 per cent this year.
Aside from private equity, real estate appears to be another potential winner among the region’s investors, with 100 per cent of the respondents expecting more money to flow into the sector. “So, every single sovereign investor in the Middle East has told us they are going to increase their allocation to global real estate and have done so and will continue to do so,” Tolchard explained.
The shift towards the emerging markets and alternative investments doesn’t mean investors are looking for a short-term gain. “This is strategic and structural, so this is partly driven by the fact that they were underweight in these asset classes that produce high yield,” said Tolchard. Another influencing factor is the expectation of additional funding and the fact that interest rates are low, making infrastructure and real estate ideal choices.
While there’s a lot of money going out of the region, Tolchard pointed out that the UAE continues to attract private capital. “In general terms, the UAE is seen as a country of stability and whether it is a sovereign fund or otherwise, the primary driver of where money is invested is always going to be whether it is a stable place. Certainly the UAE has benefited from being seen as stable, especially after the Arab Spring.”
