Middle East sovereign investors target infrastructure projects

Sovereign investors increased their allocations into private credit by 44%

  

LONDON - While equities remain at the center of most global sovereign investors’ portfolios, a survey conducted by asset manager Invesco found that average allocation to alternatives has doubled in the past five years, reaching a high of 20 percent last year.

In the Middle East, sovereign investors increased their allocations into private credit by 44 percent and infrastructure by 33 percent over the past three years. Exposure to private equity and real estate increased at a lesser rate, the survey published on Monday found.

The study was based on face-to-face meetings with 126 individual sovereign investors and central bank reserve managers from around the world, representing $17 trillion-worth of assets.

“Private markets are favored by many sovereign investors, thanks to the long term and illiquid nature of many asset classes within this market. However, investing in private markets has been a consistent challenge for sovereign investors, and as a result many remain underweight,” said Zainab Kufaishi, head of institutional sales for Middle East and Africa at Invesco.

“Good opportunities are seen in infrastructure and in private credit, but respondents are seeing fewer attractive opportunities in private equity because of increased competition for assets and bidding up of prices. Over three fifths (61 percent) of respondents raised concern that private equity is becoming over-valued.” 

The dominance of equities in investors’ portfolios has been growing over the past few years, with the average global investor allocation to equities rising to 33 percent this year from 29 percent in 2017.

Equity returns stand at 8.7 percent, according to survey respondents, compared to 9.4 percent in 2017 and 4.1 percent in 2016.

The survey found that nearly half of all sovereign investors are now incrementally or materially overweight in equities.

More than a third said they were considering whether to reduce equity weightings in the medium term, with plans to make “small” rather than “significant” cuts.

Investors cited concerns about a possible trade war and other geopolitical risks as potential risks to the future of the equities markets.

The Invesco survey also found that sovereigns are looking increasingly at new regions rather than maintaining a traditional bias towards their home markets.

Asia Pacific has become an attractive region for infrastructure investment, due to large projects such as the Belt and Road initiative — a transport and infrastructure project designed to improve trade links to China. Around 64 percent of sovereigns surveyed said that this region presented opportunities.

Under half (41 percent) of investors said North America was an attractive region for investors, and that the market’s appeal would depend on US President Donald Trump implementing his infrastructure plans.

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