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
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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.


Iran looms large over OPEC summit

Updated 22 September 2018
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Iran looms large over OPEC summit

  • Saudi Arabia only country in Mideast, and perhaps world, with enough capacity to keep market supplied, say experts
  • At Algiers, Opec and leading non-Opec countries are expected to discuss how to allocate supply increases to offset a shortage of Iran supplies

LONDON: The Opec summit in Algiers on Sunday meets amid widespread fears of a supply crunch when a forecast 1.4 million barrels a day of crude is lost from Iran in November when US sanctions kick in.
If, on top of that, more supply shocks hit the market in worse-than-expected disruption from Libya and Iraq, the price of crude could surge, said Andy Critchlow, head of energy news at S&P Global Platts. “At the moment, the market looks finely balanced,” he said.
There isn’t a lot of slack in the system. As Critchlow points out: “Upstream investment in infrastructure and new wells is historically low and it will take a long time to turn that around.”
At Algiers, Opec and leading non-Opec countries are expected to discuss how to allocate supply increases to offset a shortage of Iran supplies. The gathering comes after a tweet by President Trump on Sept. 20 calling on Opec to lower prices. He said on Twitter that “they would not be safe for very long without us, and yet they continue to push for a higher and higher oil price.”
Critchlow reckoned KSA still had spare capacity of about 2 million bpd. And KSA would get oil back as they go into winter as it had needed 800,000m bpd merely to generate electricity for the home market to meet heightened demand for air conditioning in the summer.
But there is uncertainty about what will come out of Algiers. For a start, the Iranians say they will not attend. That could be tricky in terms of an Opec communique at the end of the meeting as statements need unanimous support from member nations. And Iran has indicated it will veto any move that would affect Iran’s position, ie, one where other countries absorb its market share as sanctions bite.
Jason Gammel, energy analyst at London broker Jefferies, said: “The magnitude of the drop in Iranian exports is likely to be higher than any hit in demand as a result of problems linked to emerging market currencies, or trade wars. That’s why we expect oil prices to continue to strengthen. The Saudis and their partners will keep the market well supplied, and I think the issue is that the level of spare capacity in the system will be extremely low. Any threat or interruption will mean price spikes. Possibly by the end of the year demand will exceed supply; for now, the market remains in balance, but threats of supply disruption will bring volatility.”
Under the spotlight in Algiers is a production cuts accord forged by Opec and 11 other countries in 2016 which has been extended to the end of this year. The agreement helped reboot prices and obliterate inventory stockpiles that led to the crash in crude prices nearly three years ago. But how long will the agreement last? Algiers may kick that one into the long grass.
Thomson Reuters analysts Ehsan Ul-Haq and Tom Kenison told Arab News: “OPEC members would like to maintain cohesion within the group around supply ahead of Iran sanctions and declining Venezuela production, However, they are expected be in favor of maintaining stability in prices while doing so. On the other hand, they need to find a consensus around how their market share would be affected by a decision to pump more oil in the market. Any decision around production will likely be offset until the November meeting.”
Critchlow said that it is what KSA and Russia say and do that matters. “They speak for a fifth of the global oil market, producing a combined total of 22m bpd.” Together, they are the swing producers when it comes to crude production and supply.
Another factor about Algiers is that it is a meeting of the Joint Ministerial Monitoring Committee, which is not a policy-making forum. Big policy statements may have to wait for the main Opec summit in Vienna at the end of year. That said, there will be some very high-level delegations in Algiers, including the Saudi oil minister and his Russian counterpart.
A statement about the demand picture could emerge, especially as there are fears about the impact on the global economy from the US-China tariff war.
Looking to the future, Critchlow thought the Opec production cuts accord would carry on into 2019. “Oil priced between $70/bbl and $80/bbl is a sweet spot for Middle East producers. Its’s good for Saudi as it helps stop further drainage of their foreign reserves and moves the budget back toward balance. Do they want (the price) to go higher? I think that would cause a lot of political problems for them.”