Major sovereign governments and sovereign wealth funds (SWFs) in the Middle East are investing less internationally than they have done at any point in the last three years, according to a recent study.
The international flow of money directly from GCC sovereign governments and from SWFs has changed considerably in light of the current unrest, with large commodity-linked surpluses in these regions increasingly being put to use locally, said the third annual Invesco Middle East Asset Management Study.
Invesco’s study, which is the only in-depth report of its kind, has analysed sovereign revenues and defined the investment behaviours of major SWFs in the GCC region.
These SWFs account for 35 per cent of global SWF flows, representing 1.6 trillion, a huge market which major global economies, including the UK, rely on for investment, said the study by Invesco, which opened its Dubai office in 2005.
The available surplus, or investable assets, of governments in the GCC region is forecast to reduce by 9 per cent in 2012 (when compared to 2011) and surplus forecasts have been revised downwards since the Arab Spring, according to the study.
This is illustrated by the fact that forecast funding rates for the recipient SWFs have declined this year.
According to Invesco’s study, in 2011 funding rates grew at 13 per cent compared to an increase in GCC government revenue of 25 per cent, this year funding rates rose just 8 per cent, despite GCC government revenue increasing by 31 per cent.
The funding for sovereign pension funds on the other hand rose from 8 per cent growth in 2011 to 13 per cent growth in 2012. There is an expectation that spending will continue to increase over time potentially outstripping commodity prices and shrinking surpluses further.
Of the sovereign surplus that is available for SWFs, those with local objectives are expected to benefit, the study said.
Invesco forecasts SWF assets invested in benchmark driven SWFs who prioritise international asset manager products or ETFs have fallen by one per cent since the beginning of the ‘Arab Spring’ in 2011.
At the same time sovereign wealth fund assets allocated to SWFs investing locally, in infrastructure for example, have risen by 10 per cent, which illustrates a major shift.
Nick Tolchard, the head of Invesco Middle East said, “It’s clear that sovereign states are redirecting revenues and SWF assets from international investments back into the Middle East. The most common change across the region is money into local wage inflation, with healthcare and education a real focus for Saudi and Oman.’
Major infrastructure is a focus for Qatar due to the World Cup, and there are significant developments taking place in Abu Dhabi as it seeks to grow and set up as a major financial centre, said the study.
“Western governments, including the UK, have approached SWFs from the Middle East to help with economic recovery, but many will fight a losing battle. There is certainly less money to invest internationally so the stakes are higher.’
‘Those courting GCC money from outside the region will only win with a deep understanding of what is driving the thinking of SWFs, and a long term commitment to building bi-lateral relationships which add value to their investment policy,’ he added.