More than half of sovereign investors in the Middle East saw drawdowns in 2020, with many stepping in to support local economies and plug fiscal deficits, according to global investment management firm Invesco.

In its ninth Global Sovereign Asset Management Study, the firm found that 57 percent of Middle East sovereigns saw drawdowns in 2020, including 78 percent of liquidity sovereigns and 58 percent of investment sovereigns, compared with a third globally. 

Josette Rizk, Director Institutional Clients Middle East & Africa at Invesco, said: “The COVID-19 pandemic has prompted a focus on liquidity for Middle East sovereign funds, both to fund short term demands and to take advantage of future opportunities. 

“Given the commodity-based nature of regional sovereigns, it is not surprising that they were called on for support to fund necessary business relief as the result of the COVID-19 pandemic through drawdowns.”

Many sovereign funds had learned the importance of building large liquidity reserves, following the global financial crisis, and were successful in supporting local economies and large companies in need of stabilisation finance, Invesco said.

But the scale and speed of withdrawals for those that hadn’t, meant a significant impact on allocations, and led sovereigns to reevaluate liquidity risk management.

This has prompted a shift towards cash, with portfolio cash reserves more than doubling during 2020, as some sovereigns continued to focus on liquidity in anticipation of possible further withdrawals. 

However, sovereigns also noted that the pandemic had shone a spotlight on the importance of liquidity.

The study also revealed a shift in asset allocation as sovereigns were forced to look elsewhere in the face of falling fixed income yields, as the widespread easing of monetary policy pushed rates lower.

Fixed income allocations fell from 34 percent to 30 percent globally as concerns about stimulus-driven inflation returned. The volatility present in markets through the first quarter of 2020 caused an uptick in equites, reversing a two-year trend of declining allocations.

Global sovereigns increased their allocations by 2 percent from 2020, rising to 28 percent. A further 30 percent of respondents, including 14 percent in the Middle East, expect to increase their allocation to equities over the next 12 months, Invesco said.

(Reporting by Imogen Lillywhite; editing by Seban Scaria)


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