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Middle East sovereigns eye European equities, fixed income

Invesco’s head of Middle East and Africa observes a risk-off attitude in the wholesale client segment.

Middle East sovereigns eye European equities, fixed income

Sovereigns in the Middle East have reportedly outperformed their targets in 2019. They have exhibited agility and resilience during the recent volatility, and have been able to move quickly to take advantage of global opportunities.

High valuations towards the end of last year meant the lowering of equity allocations for investors in the region with caution over the end of the cycle, said Zainab Kufaishi, head of Middle East and Africa at Invesco.

Even before Covid-19 affected markets, investors already exhibited caution and subsequent dry powder also meant that they executed quickly in dislocated markets. Investor sentiment in the region differs by mandates, risk tolerance profiles and time horizons.

‘We have seen a relatively risk-off attitude in the ‘wholesale’ client segment where they have put a watch and brief on the markets, especially given current valuations and recent rallies,’ Kufaishi said.

The same was also observed to a certain extent among sovereign investors, but given the longer-term investment horizons of this segment, sovereigns continue to look at asset classes that offer attractive opportunities over the short to medium term. As long-term custodians of capital, regional sovereigns have built up large reserves to weather the shocks in today’s markets, Kufaishi added.

US elections

Sharing her views on the upcoming US elections and how it has impacted her clients’ sentiments, Kufaishi said: ‘I cannot comment on the upcoming election in the US in particular as influencing allocations of investors.  The vast majority of our sovereign and institutional clients have a long-term horizon with their investments.’

She said this enables them to withstand the kind of market upswings as well as downswings that we might experience as the result of shocks from events such as the Covid-19 health pandemic we see today, or natural disasters or geopolitical events.

‘Having said that, our sovereign study revealed that sovereign investors in the Middle East are well prepared for market shocks, having excess cash to take advantage of global buying opportunities during a crisis or market turn as we saw happen during the recent market downturn.’

Investment trends

Looking ahead, Middle Eastern sovereigns seek to increase allocations to equities. According to a recent Invesco study, average equity allocations as an overall proportion of a portfolio at the end of 2019 were 16%, compared with 34% to illiquid alternatives and 32% to direct strategic investments.

Kufaishi said that several sovereigns are looking to Europe for bargains as markets have recoiled during the Covid-19 pandemic, increasing exposure to emerging and developed European blue-chip companies.

The market turmoil in March and April saw asset prices fall considerably, especially as some investors sold securities to ensure liquidity. This in turn had presented opportunities to gain exposure to ‘blue chip’ companies at ‘very good prices’.

Beyond that, she also sees an anecdotal focus on allocations to China and Asia, as the region has shown clear signs of recovery and stimulus support which is likely to provide support to equities.

Over the next 12 months, the region’s sovereigns also envision increasing allocations to fixed income. They currently have allocations in real estate debt, infrastructure debt as well as asset backed securities/structured credit.

While emerging market debt maintains its wide appeal amongst as a means to diversify and boost returns, the interest moving forward is largely in private equity and infrastructure. And within the infrastructure asset class, Middle East sovereigns demonstrate most interest in communications and airports.

Alongside traditional fixed income, Kufaishi said that sovereigns see significant interest in alternative’ fixed income asset sub-asset classes such as high-yield and leveraged loans, which they believe to present significant value. 

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