MUSCAT: Surging inflation has prompted sovereign investors to re-examine their asset allocation, with private markets the main beneficiary, according to the latest Invesco Global Sovereign Asset Management Study.
Now in its tenth year, the study details the views of 139 chief investment officers, heads of asset classes and senior portfolio strategists at 81 sovereign wealth funds and 58 central banks around the globe, who together manage $23 trillion in assets.
Inflation shock
After a long period of low interest rates and low inflation, sovereign investors have been forced to reconsider their macroeconomic assumptions and adjust their investments accordingly. The majority of sovereigns in the Middle East (55 per cent) have repositioned their portfolios in anticipation of further rate rises, though the sharp correction in equities and failure of bonds to shelter portfolios have presented difficult choices.
Zainab Faisal Kufaishi, Head of the Middle East and Africa, and Senior Executive at Invesco said, "While most markets ended 2021 with a cautiously optimistic outlook for 2022, the start of the year presented a perfect storm of challenges for investors. Inflation is surging, global growth is slowing and geopolitical tensions are rising. Where the macro environment had once been relatively predictable, it is now more uncertain, sending sovereigns to rethink how to position their portfolios as they look ahead.”
Invesco’s study affirms that while global sovereigns’ fixed income allocations have declined steadily in recent years, they are no longer being redirected to listed equities. Instead, they are going to private market alternatives, notably real estate, private equity and infrastructure. In the Middle East, most (82 per cent) respondents agree that real assets are effective hedges against inflation and higher yields.
Zainab Kufaishi commented, “While there are some concerns about deal flow and supply driving valuations higher, private markets remain attractive to long-term investors in the region because they provide a long-duration play and shelter from volatility.”
Interest in private assets looks set to continue, with 50 per cent of sovereign wealth funds in the Middle East citing an intention to increase allocations to private equity, 20 per cent to real estate and 20 per cent to infrastructure over the next 12 months. Globally, private assets now constitute, on average, 22 per cent of sovereigns’ portfolios, the highest proportion on record. In total, sovereign investors now own $719 billion in private assets, up from $205 billion in 2011.
Although the increased interest in private markets has come at the expense of reduced allocations in fixed income for sovereign funds globally, some respondents, including those in the Middle East, are looking to take advantage of opportunities arising from the equity market correction, as well as right entry-points for fixed income as rates begin to rise.
Rod Ringrow, Head of Official Institutions at Invesco, commented: “‘Uncertainty’ has been the word dominating investors’ conversations so far this year. After a relatively predictable few years, consensus over the direction of the global economy has broken down. This, paired with the potential end of a multi-decade bull run in fixed income markets, is creating a new backdrop for sovereigns.
“While many are looking to private markets for solutions, we should not overstate the pace of this shift. As long-term investors, sovereigns are treading very carefully and many are making only incremental changes to their portfolios, adopting a ‘wait and see’ approach.”
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