Oil crunch forces Middle East funds to hunt for alternative assets

Gold is a favorite choice for Middle East sovereign investment funds seeking a cushion against falling oil prices. (Reuters)
Updated 21 February 2018
0

Oil crunch forces Middle East funds to hunt for alternative assets

LONDON: Middle Eastern sovereign wealth funds (SWFs) are buying more alternative assets, such as private equity, real estate, gold and infrastructure, to lift returns in an era of lower oil prices.
The move by SWFs to tilt their investment portfolios more toward alternative assets is a worldwide trend, a direct result of the crash in the oil price four years ago, according to a report by the global consultancy PricewaterhouseCoopers (PwC).
SWFs now allocate almost a quarter of their assets under management to alternative investments, with “lower oil prices for longer” driving the funds to broaden their investment strategies. Investment in fixed income instruments, such as government bonds, had dropped from a peak of 40 percent in 2013 to 30 percent in 2016, PwC said.
The report, titled “The rising attractiveness of alternative asset classes for sovereign wealth funds,” said that although the funds faced adverse conditions in recent years when asset growth began to stall as a result of falling oil prices, total assets under management still grew to $7.4 trillion in 2016, albeit at a slower pace than in earlier years.
PwC said it expected the growth rate of assets under management to increase in the coming years as SWFs invested in non-fossil sources and diversified their portfolios to include alternative investments.
Laurent Depolla, PwC Middle East sovereign investment funds leader, said: “Middle East SWFs, in general, have been following the global trend by allocating more capital toward alternatives. Over the five-year period their average allocation to the alternatives asset class has increased from 3.7 percent to 6.1 percent of total assets, while their average target allocation rose from 6.5 percent to 8.6 percent.  
“This can be attributed to new sovereign wealth funds entering the asset class as well as continued appetite from those already active.”
Infrastructure was also a large focus of SWFs in the region. The data firm Preqin
said that European infrastructure deals were particularly attractive for Middle Eastern SWFs, with some “possibly looking to deploy capital at even lower preferred rates of return.”
Commenting on the key influences facing investors in the Middle East, Tarek Shoukri, PwC sovereign investment fund director, said: “Middle East SWFs seeking to generate superior returns under challenging economic conditions have started to adjust their investment strategies. Due to the drop in the oil price in recent years, there have been less inflows from their traditional revenue sources.”
However, the funds’ attempts to maintain return objectives by investing in certain alternative asset classes was not without risks as most alternatives were highly illiquid, the PwC report warned. One exception was gold, an asset with “one of the highest rates of daily volumes exchanged and one that can provide protection against short and medium-term market corrections.”
Will Jackson-Moore, PwC’s global head of sovereign investment funds and private equity, said: “SWFs play an important role helping governments stabilize the economy and exchange rates. We expect alternatives to be prominent in SWF portfolios in the future as they can offer increased diversification, principal protection, a hedge against inflation, and an increase in portfolio performance.”  
But Jackson-Moore cautioned that finding the right allocation strategy for these asset classes was crucial. Monitoring of portfolios and investments was essential, he said, and capital would sometimes have to be reallocated to reflect economic developments.
“Overall, though, the benefits seem to outweigh the costs, as the varied nature of alternatives provides SWFs with the ability to select an asset class specific to their investment needs,” he said.


Mozambique’s gas-fueled future threatened by militants

Updated 3 min 2 sec ago
0

Mozambique’s gas-fueled future threatened by militants

MAPUTO: An unprecedented wave of militant attacks in northern Mozambique has raised fears the country will fail to fully cash in on a gas bonanza.
After 180 trillion cubic feet (5.1 trillion cubic meters) of natural gas were discovered off the country’s northeastern shore, Mozambique entertained dreams of following Qatar down the path toward wealth. The government even predicted that by 2035, the country’s GDP per head could increase sevenfold.
But the southeast African country’s golden vision has been thrown into doubt by an explosion of bloodthirsty assaults by a shadowy militant group in the region where the industry plans to base its hub.
Since October, more than 30 people have been killed in brazen assaults on unarmed villagers.
Security forces have rushed reinforcements to be area yet seem powerless to stem the attacks. Terrorized, many civilians have fled their homes and a cloud hangs over the great expansion plans.
US oil and gas giant Anadarko, the largest exploration company in the region, has invested $4 billion (3.4 billion euros) so far — it plans to put in $20 billion over the lifetime of the gasfields.
But following a US embassy alert on June 8 that warned of an imminent attack on the regional gas hub Palma, Anadarko temporary suspended some activities and moved affected workers and contractors to a secure site.
Canada’s Wentworth Resources has already suffered delays to its projects as a result of the insecurity, forcing it to seek a year-long extension for its initial exploration.
In its successful application to the authorities, Wentworth said the attacks had “prevented safe access to the area for Wentworth staff and contractors.”
There have been more than 10 attacks on villages since October, featuring beheadings and arson. None has targeted gas operations.
“Due to the attacks, we took additional measures to protect not only the oil and gas companies operating in that area, but also to protect the communities,” said Joaquim Sive, the police commander in Cabo Delgado.
Eric Morier-Genoud, a researcher at Queen’s University Belfast, said any attack against the gas “majors” would be an “escalation from which the militants would come out the losers.”
“At this point... based on the information we have, we classify the attacks as an insignificant risk to the economy,” Rogerio Zandamela, the governor of Mozambique’s central bank, told AFP.
In contrast to this, the central bank did consider a spate of attacks carried out by a militia loyal to the main opposition Renamo party in the country’s center in 2015 and 2016 as an economic risk.
“There was much more clarity about the conflict in central Mozambique... We cannot equate the north with the south,” Zandamela said. “The information available on the conflict in Cabo Delgado is very limited.”
Police have stepped up security around gas projects — particularly those close to areas that have come under attack, national police spokesman Inacio Dina told AFP.
An official at Anadarko, who declined to be named, said “There have been no threats specific to our project. However, it is a cause for concern, and therefore, as operations continue, we have undertaken appropriate measures.”
The company has a gas operations camp in a forest on the Afungi Peninsula.
Police and army units have established a command post in the forest following the attacks.
But a source at Anadarko told AFP that the firm has also stepped up its own security efforts, increasing its private protection force by two-thirds — a move that will have an impact on costs.
Despite such problems, foreign investors for now still have a big appetite for a share of Mozambique’s gas treasures.
Japan’s Tokyo Gas and Britain’s Centrica inked supply deals with Anadarko on June 15 — just a day after a machete attack on the village of Ibu.
Even so, experts say the instability in the northeast could still prove costly. It could cut into the dividend that Mozambique expects from the huge find.
“(The gas projects) are at risk in their early stages, as attacks can adversely affect logistics. Materials must reach Palma by land,” said Maputo-based political science researcher Joao Pereira.
“The insurgency is most likely to delay rather than derail development of the sector,” said Ed Hobey-Hamsher, an analyst at global risk consultancy Verisk Maplecroft.
“Attacks will certainly make the investment more expensive because of security needs reducing revenues for the state.”