Why are Middle East sovereign investors focusing more on Asia?

Dubai: Sovereign investors from the Middle East are increasingly focusing on investment opportunities in emerging markets, particularly China, according to the Global Sovereign Asset Management Study by Invesco, an independent global investment management firm.

The latest and the seventh edition of the study, an annual in-depth report on the complex investment behaviour of sovereign wealth funds and central banks, showed growing disenchantment with Europe among sovereign investors and increased interest in emerging markets, particularly China.

According to the study, 88 per cent of investors in the Middle East have exposure to China, versus 73 per cent for all investors globally. This year’s study was conducted face-to-face amongst 139 individual sovereign investors and central bank reserve managers across the globe representing $20.3trillion of assets, of which 71 are central banks, reflecting their growing status as sovereign investors.

China focus

China’s attractiveness rating for sovereign investors has improved more than any other major region since 2017. Approximately 100 per cent of sovereigns in the Middle East with China exposure held Chinese equities, showing that the government’s measures to open the market to foreign investors are bearing fruit. Middle East respondents have focused on building their expertise in China by investing in partnerships, developing in-house proficiency and setting up dedicated Asian offices.

For sovereigns in the Middle East, investment risk is seen as the biggest challenge to investing in China. Transparency remains a significant obstacle to higher allocations in China for global sovereigns, while for those sovereigns with no existing allocation to China, investment restrictions and currency risk are seen as the main impediments.

“We are observing an interesting shift in terms of both geographic and sector allocation from the Middle East. The need to balance global exposure is leading many of the regional investors to explore opportunities in emerging markets and Asia, especially due to the attractive emerging market fundamentals and valuations. Whilst increasing allocation to China remains on the radar for regional investors, investment risk is seen as the biggest challenge to investing in the country,” said Josette Rizk, Client Director, Institutional Sales, Invesco Middle East and Africa.

The study showed Middle East investors are also increasing allocations to Asia as a region, with 75 per cent having increased allocations in 2018 compared with 47 per cent for all investors surveyed. Indications are that this trend will continue in 2019.

Europe slips

A combination of slowing economic growth and perceptions of rising political risk have led to a decline in the perceived attractiveness of major European economies. Brexit is now influencing asset allocation decisions for 64 per cent of all sovereigns, though this is higher in the region with 78 per cent. Continental Europe is seen as increasingly uncertain with the ascendance of populist movements in major European economies such as Germany and Italy, and is impacting asset allocation decisions for 46 per cent of all respondents.

This has resulted in Europe falling out of favour, with half of sovereign investors in the Middle East decreasing allocations to Europe in 2018 and a similar number planning further decreases in 2019. Only 13 per cent of global sovereigns plan on increasing allocations to Europe this year, compared to a 40 per cent allocation to Asia and 36 per cent to Emerging Markets.