Sovereign funds in the Middle East stepped in to support local economies and helped governments to plug fiscal deficits amid coronavirus-induced headwinds last year, according to a new report by asset manager Invesco.
More than half of sovereign investors drew down funds and many shifted their strategies to focus more on equity markets and environment, social and governance opportunities, Invesco said in its ninth annual Global Sovereign Asset Management Study.
The Covid-19 pandemic last year tipped the global economy into its worst recession since the 1930s as nations were forced to close borders, causing severe disruption to global trade and the travel and tourism sector.
Governments and central banks around the world poured more than $16 trillion in fiscal aid and $9tn in monetary support to stabilise financial markets and help businesses and households.
The impact on public finances led some Middle Eastern governments to turn to sovereign wealth funds for capital to save lives and livelihoods and plug budget deficits.
More than a third of sovereign funds globally and 57 per cent in the Middle East faced drawdowns last year, including 78 per cent of liquidity sovereign funds and 58 per cent of investment sovereign funds, according to the Invesco study.
“Given the commodity-based nature of regional sovereigns, it is not surprising that they were called on for support to fund necessary business relief as the result of the Covid-19 pandemic through drawdowns,” said Josette Rizk, Middle East and Africa director of Invesco's institutional clients business.
The study – which surveyed 141 chief investment officers, heads of asset classes and portfolio strategists at 82 sovereign wealth funds and 59 central banks across the globe, who manage $19tn in assets – said the portfolio cash reserves of Middle East sovereign funds more than doubled during 2020.
“The Covid-19 pandemic has prompted a focus on liquidity for Middle East sovereign funds, both to fund short-term demands and to take advantage of future opportunities,” said Ms Rizk.
There has also been a shift in asset-allocation strategies as sovereign funds look at equities more favourably amid a drop in fixed-income yields on the back of interest rate cuts to historic lows. Fixed-income allocations fell from 34 per cent to 30 per cent as concerns about stimulus-driven inflation returned.
Global sovereign wealth funds increased their allocations into equities by 2 per cent from 2020, to 28 per cent. A further 30 per cent of respondents, including 14 per cent in the Middle East, expect to raise their allocation to equities over the next 12 months.
Sovereign funds in the Middle East also expect to significantly increase their allocations to property (57 per cent), private equity (29 per cent), infrastructure (43 per cent) and direct strategic investments (29 per cent).
“The long-term investment horizon of Middle East sovereigns makes rising allocations to these more illiquid private markets more attractive,” said Ms Rizk.
The latest Invesco study also revealed that climate change risks remain high on the agenda in the Middle East, with 75 per cent of respondents indicating that environmental concerns influence their asset-allocation decision, compared with 62 per cent globally.
For Middle East sovereign funds, climate change is seen as one of the most significant risks to property portfolios, with 88 per cent of investors increasing their consideration of climate risk when making property investments.
The Covid-19 pandemic broadly acted as a catalyst for sovereign funds and central banks to prioritise ESG, with 32 per cent of respondents overall and 50 per cent of those in the Middle East increasing their focus on socially responsible investments as a result of the pandemic, according to Invesco.
Central bank sentiment has also shifted significantly over the past year, with 65 per cent of respondents in 2021 saying climate change falls within their remit, up from 46 per cent in 2020.
About 67 per cent of Middle East central banks believe that green bonds are a desirable foreign reserve asset, Invesco said.
In terms of geographies, the survey found that 75 per cent of sovereign funds are attracted to opportunities in China while a further 57 per cent consider the country to be an important portfolio diversifier.
In the Middle East, sovereign investors also underlined the need to better reflect China’s position as a trading partner. About three quarters of Middle East sovereign funds are currently invested in China and six in 10 of them expect the size of their allocation to increase over the next five years.
“As a major part of the global economy and a significant contributor to global GDP [gross domestic product], sovereigns in the Middle East look to China as a long-term play. The rising interest in China is reflected in the growing universe of attractive investment opportunities,” said Ms Rizk.