Dubai: Allocation to fixed income displaced equities as largest asset class for sovereigns in 2018, as the year turned out to be a challenging year for sovereigns as weak and volatile equity markets led to a decline in overall investment returns, according to the Global Sovereign Asset Management Study by Invesco.
The study showed, on average, sovereign investors achieved returns of 4 per cent in 2018 compared to 9 per cent in 2017. Despite the decrease in returns, sovereigns performed well given negative returns from global equities, which fell 8.7 per cent in US dollar terms during the year, according to MSCI World Index.
The majority of sovereigns (89 per cent) anticipate the end of the economic cycle within the next two years. This combined with volatility concerns and the prospect of negative returns from equities has led to increased fixed income allocations and more diversification in allocations to infrastructure, real estate and private equity markets.
Fixed income allocations increased to 33 per cent in 2019 from 30 per cent in 2018, becoming sovereigns’ largest asset class. However, in the Middle East, allocations to illiquid alternatives was particularly prominent with 75 per cent increasing allocations to infrastructure, 63 per cent to private equity and 38 per cent to real estate, a marked difference in strategy to the global sample.
The region is particularly exposed to global economic cycles due to a reliance on oil revenues and therefore has even greater incentive to invest in such assets for diversification.
Sovereigns in the Middle East recognise technology as a large and broad-based investment opportunity, with 89 per cent of Middle East sovereigns having a dedicated technology portfolio or team, compared with 48 per cent globally. Given the dominance of tech companies in terms of contribution to equity returns and economic development over the last few years, it is no surprise that 75 per cent of the Middle East respondents cited enhancing investment returns as the most important reason for placing emphasis on the sector.
Middle East sovereigns have been leaders in utilising technology investments for the benefit of domestic society. As part of several regional initiatives to create a more sustainable economy, technology and innovation play a significant role. In 2015, the UAE announced a $80 billion investment plan in the Emirates Science Technology and Innovation Higher Policy, and Saudi Arabia has made technological innovation central to its Vision 2030.
“Technology and innovation is becoming an important part of their overall portfolio. This is primarily driven by attractive returns that tech companies offer and is also aligned with the agendas of many of the regional governments, particularly of the UAE and Saudi Arabia, who want to ultimately develop a knowledge economy to drive economic development in their countries,” said Josette Rizk, Client Director, Institutional Sales, Invesco Middle East and Africa.