Global sovereign capital flows into the US markets is on the rise while investor preference for leading emerging markets are on decline according to Invesco’s latest Global Sovereign Asset Management.
Data shows the US has taken the lead in asset allocations in 2016. For the Middle East sovereigns the position has been more stable with the US being the preferred market since 2014. Scoring a rating of 8.2 (out of ten) in attractiveness to sovereign investors in 2014, this has risen to 8.3 in 2016 — compared to a slightly lower 7.1 rating in 2016 for the UK. Middle East sovereign investors also remain bullish on future opportunities in the US, and in US infrastructure in particular.
“Investment friendly government policies and overall ease of doing business has made the US more attractive to global sovereign investors,” said Alex Millar, Head of Invesco EMEA sovereigns & Middle East and Africa institutional sales.
The study showed that sovereign investors globally expressed the view that the US appears increasingly open to their investments following positive perceptions of sovereign investments into the US financial sector during the global financial crisis. Many also feel it is now easier and more attractive to invest in the US, in large part-linked to more investment friendly policies such as the introduced exemption in 2016 for ‘qualified foreign pension funds’ from the Foreign Investment in Real Property Tax Act on real estate purchases.
Fondness for frontier markets
Data showed that new allocations to frontier markets are on the rise, with Middle East allocations to emerging Asia increasing from 1.5 per cent in 2014 to 2.3 per cent in 2015, and in Africa from 1 per cent to 2.6 per cent.
Manufacturing capability, political stability, and the quality of infrastructure are cited as key factors for this change, and via a range of products including conventional equity and fixed income products, and direct investments into alternatives such as real estate.
Conversely, the Bric markets — Brazil, Russia, and China — have all lost their attractiveness to Middle East sovereign investors amid weaker performance, with only India becoming increasingly attractive. In comparison to the last few years, sovereign investors globally are now less willing to overlook political and regulatory concerns in these regions in order to hit target allocations. Sovereign investors note a struggle with commodity prices and falling stock markets for large export markets like Brazil and Russia, while the shrinking labour force in China is driving up manufacturing costs and squeezing private sector margins.
Among the Bric countries, India is notable exception and is emerging an attractive destination for sovereign investments.
“Despite being long-term strategic investors, sovereign investors are quick to adjust to perceptions of market attractiveness, responding to latest market data or regulatory change. Market performance and public policy also factor into their longer term strategic asset allocation choices - especially geographically,” said Millar.
The ability for governments to attract sovereign investment via policy decisions is a key finding and presents an opportunity for governments globally to attract significant long-term capital to support economic growth.
By Babu Das Augustine
