Mapping Middle East asset allocation

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Investing in a volatile and politically uncertain environment is a context many investors face, Middle Eastern investors perhaps more so than others. A recent survey conducted by Invesco Asset Management tracks down their investment challenges and decisions.

The Middle Eastern asset management market is dominated by sovereign wealth funds (SWF), their assets cover approximately 37.1% of the global market share, according to the Sovereign Wealth Fund Institute. The Abu Dhabi UAE Investment Authority is, with $773bn (€662bn), the second largest SWF worldwide; while Saudi Arabia ranks third and Kuwait fifth .

While most Middle Eastern countries are still defined as frontier markets, Qatar and UAE have recently been reclassified by S&P and MSCI as emerging markets. This is increasingly reflected in their asset allocation. According to the Invesco Survey, allocation to domestic assets currently constitutes 42% of SWF investments.

Another interesting characteristic of most Middle Eastern SWFs is the fact that liquidity plays a subordinate role compared to investment and liability – some funds even provided lending to their respective governments during the 2008-9 financial crisis.

With regard to asset allocation, SWFs have shown a drop in demand over the past year for both equities and fixed income. Demand for global equities has fallen by 25% compared to a rise of 34% in the rest of the world. Similarly, year on year demand for fixed income has dropped by 44% compared to a 3% increase globally.

At  the same time, the attention of SWFs in the Middle East has shifted clearly towards alternatives including private equity funds, which saw an 80% increase relative to 2013, compared to a 37% increase globally. Investments in real estate are, however, rising fastest. Compared to the previous year, the latest Invesco data points to a 100% increase in demand, more than double the 44% growth in real estate investments globally.

Faced with ongoing geopolitical risk the UAE has increasingly emerged as a relative safe haven, as is reflected in the strong flow of assets from countries in the Middle East North Africa region into UAE over the last few years.This effect consolidated in 2013, with inflows increasingly shifting from short term holdings such as bank deposits towards long term investments such as real estate. Private capital inflows from Mena countries to UAE increased from 19% to 35% of the total inflows, comparing 2013 against 2014, while at the same time overall inflows from emerging markets declined from 58% to 43%.

One of the suggestions of the data is that as a result of the conflict in Crimea, private capital inflows from Russia and CIS countries to UAE increased as a proportion of the total from 10% to 17%. However, they remain relatively liquid and can be withdrawn at short notice.

Nick Tolchard (pictured), head of Invesco Middle East, commented: “The fact that many respondents attributed capital inflows to local investment opportunities shows that the UAE is becoming an increasingly attractive investment destination in its own right.”

Underlining the suggestion that the reasons for investing in UAE have shifted, some 33% of respondents in the survey conducted for the research cited ‘local investment opportunities’ as the key driver of private capital flows, up from 29% last year, and pushing ‘local political stability’ into second place as a reason. While the search for stability continues to be a key factor, its relative importance has decreased slightly.

Mona Dohle
Mona Dohle speaks German and Dutch, she is DACH & Benelux Correspondent for InvestmentEurope. Prior to that, she worked as a journalist in Egypt and Palestine. She started her career as a journalist working for a local German newspaper. Mona graduated with an MSc in Development Studies from SOAS and has completed the CISI Certificate in International Wealth and Investment Management.

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