Middle East sovereign funds go bargain hunting as pandemic hits asset values

Europe is a preferred destination for managers seeking underpriced securities, Invesco's sovereign asset management study finds

In July, Abu Dhabi had rolled out a basic industries project aimed to make the emirate self-sufficient in the production of basic consumer and industrial products. Chris Whiteoak / The National
In July, Abu Dhabi had rolled out a basic industries project aimed to make the emirate self-sufficient in the production of basic consumer and industrial products. Chris Whiteoak / The National

Sovereign wealth funds in the Middle East intend to use their cash reserves to take advantage of buying opportunities as asset valuations fall due to market turmoil caused by Covid-19.

State-controlled investment funds are keen to invest in fixed income assets, particularly in alternative asset classes and infrastructure projects, investment manager Invesco said in its annual Global Sovereign Asset Management Study.

The report surveyed 139 chief investment officers, heads of asset classes and senior portfolio strategists from 83 sovereign funds and 56 central banks, who manage a total of $19 trillion (Dh69.8tn) in assets, the US company said.

Europe is a preferred destination for Middle Eastern investors seeking bargains.

About 38 per cent of regional funds surveyed said they plan to increase their exposure to emerging Europe while the same percentage said they are considering deals in developed Europe.

“The market turmoil in March and April saw asset prices fall considerably, especially as some investors sold securities to ensure liquidity,” Zainab Kufaishi, head of the Middle East and Africa department at Invesco, said.

“This presented opportunities to gain exposure to ‘blue-chip’ companies at very good prices."

The Covid-19 pandemic has killed about 606,000 people around the world and infected more than 14.5 million others, according to Johns Hopkins University.

The International Monetary Fund expects the global economy to contract 4.9 per cent this year before making a sluggish recovery next year.

The world economy, which faces its deepest recession since the Great Depression, is expected to lose more than $12 trillion (Dh44.1tn) in 2020 and 2021 as a result of the coronavirus-driven decline.

Economic headwinds caused asset prices to tumble in March and major global indexes such as the S&P 500 and Dow Jones Industrial Average entered bear market territory in the third week of the month.

Equity markets have since recouped their losses.

Regional sovereign wealth funds now prefer debt as an asset class over equities and 57 per cent plan to increase their investment in fixed income assets within the next 12 months, Invesco said.

“Traditionally, fixed income is seen as a defensive anchor and this was tested by the crisis, with even US government debt caught up in a broad sell-off as investors rushed into cash,” Rod Ringrow, head of official institutions at Invesco, said.

“However, government interventions [such as] rate cuts and global quantitative easing forced yields down and had a positive impact on many fixed-income portfolios.”

Regional fund managers said they plan to expand their allocations to alternative fixed-income investment and many have formed internal teams to manage such strategies.

More than eight in 10 have allocations for property debt, 71 per cent for infrastructure debt and 71 per cent for asset-backed securities or structured credit, the report said.

Emerging market debt also has a wide appeal among regional investors, with 71 per cent of respondents saying they have exposure to emerging market debt.

“We see investors looking at less traditional credit assets such as emerging market debt as they look for portfolio diversification to boost returns,” said Ms Kufaishi.

“Emerging markets have become better developed and more accessible, which is driving increased interest.”

In 2019, 75 per cent of Middle East sovereign funds outperformed their targets but exhibited caution even before Covid-19 affected markets.

Average equity allocations as an overall proportion of their portfolios at the end of last year were just 16 per cent, compared with 34 per cent in illiquid alternatives and 32 per cent in direct strategic investment, according to Invesco’s report.

Central banks and a small but significant group of global sovereign investors have been increasing their allocations to gold this year.

On average, 4.8 per cent of total central bank reserve portfolios are in gold – up from 4.2 per cent in 2019 – with almost half of central banks citing a potential to replace negative yielding debt as a primary advantage, the report said.

Updated: July 21, 2020 02:59 AM

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