Middle East sovereign investors have piled into European companies in the wake of the coronavirus disease (COVID-19) pandemic, according to an Invesco survey.
Sovereigns in the Middle East were more likely to look to Europe for bargains over the next 12 months, with 38 percent increasing their exposure to emerging Europe and the same proportion to developed Europe.
“The market turmoil in March and April saw asset prices fall considerably, especially as some investors sold securities to ensure liquidity,” said Zainab Kufaishi, head of the Middle East and Africa at Invesco. “This presented opportunities to gain exposure to ‘blue-chip’ companies at good prices.”
Sovereign wealth funds in the Gulf are among the biggest in the world. Invesco said many were well prepared for the COVID-19 crisis, which it called an “unprecedented buying opportunity.”
Funds, it added, had learned the lessons from the 2008 financial crisis, which included building large cash reserves and making organizational improvements for managing liquidity.
At the end of 2019, even before COVID-19, Middle Eastern sovereign funds were cautious. Their average equity allocations as an overall proportion of the portfolio were 16 percent, compared to 26 percent for their peers globally.
Looking forward, 43 percent of Middle East sovereigns said they planned to increase allocations to equities at lower valuations, with 29 percent of sovereigns aiming to decrease equity allocations.
At the same time, 57 percent said they would increase fixed-income allocations, 43 percent would boost infrastructure exposure, and half planned to increase their private equity allocation.
“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. However, government interventions ... had a positive impact on many fixed income portfolios” said Rod Ringrow, head of official institutions at Invesco.
Gold has also proven popular among sovereign investors. On average, 4.8 percent of total central bank reserve portfolios are now allocated to gold, from 4.2 percent in 2019, with almost half citing the potential to replace negative-yielding debt as a primary advantage. “Last year’s study found gold to be growing in popularity, but COVID-19 has revealed it as an asset class now staking a claim to a new role within sovereign portfolios,” added Ringrow.
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