Middle East sovereign investors target infrastructure projects

Construction works of the Hong Kong section of Guangzhou Shenzhen Hong Kong express rail link. Sovereign investors are being attracted by infrastructure projects in Asia. (Shutterstock)
Updated 09 July 2018
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Middle East sovereign investors target infrastructure projects

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.

FASTFACTS

Middle Eastern sovereign investors have ramped up their exposure to private credit and infrastructure in the last three years, a survey found, reflecting a wider global trend as investors increase their allocation to alternatives.


Gulf defense spending ‘to top $110bn by 2023’

Updated 15 February 2019
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Gulf defense spending ‘to top $110bn by 2023’

  • Saudi Arabia and UAE initiatives ‘driving forward industrial defense capabilities’
  • Budgets are increasing as countries pursue modernization of equipment and expansion of their current capabilities

LONDON: Defense spending by Gulf Arab states is expected to rise to more than $110 billion by 2023, driven partly by localized military initiatives by Saudi Arabia and the UAE, a report has found.

Budgets are increasing as countries pursue the modernization of equipment and expansion of their current capabilities, according to a report by analytics firm Jane’s by IHS Markit.

Military expenditure in the Gulf will increase from $82.33 billion in 2013 to an estimated $103.01 billion in 2019, and is forecast to continue trending upward to $110.86 billion in 2023.

“Falling energy revenues between 2014 and 2016 led to some major procurement projects being delayed as governments reigned in budget deficits,” said Charles Forrester, senior defense industry analyst at Jane’s.

“However, defense was generally protected from the worst of the spending cuts due to regional security concerns and budgets are now growing again.”

Major deals in the region have included Eurofighter Typhoon purchases by countries including Saudi Arabia and Kuwait.

Saudi Arabia is also looking to “localize” 50 percent of total government military spending in the Kingdom by 2030, and in 2017 announced the launch of the state-owned military industrial company Saudi Arabia Military Industries.

Forrester said such moves will boost the ability for Gulf countries to start exporting, rather than purely importing defense equipment.

“Within the defense sector, the establishment of Saudi Arabia Military Industries (SAMI) in 2017 and consolidation of the UAE’s defense industrial base through the creation of Emirates Defense Industries Company (EDIC) in 2014 have helped consolidate and drive forward industrial defense capabilities,” he said.

“This has happened as the countries focus on improving the quality of the defense technological work packages they undertake through offset, as well as increasing their ability to begin exporting defense equipment.”

Regional countries are also considering the use of “disruptive technologies” such as artificial intelligence in defense, Forrester said.

Meanwhile, it emerged on Friday that worldwide outlays on weapons and defense rose 1.8 percent to more than $1.67 trillion in 2018.

The US was responsible for almost half that increase, according to “The Military Balance” report released at the Munich Security Conference and quoted by Reuters.

Western powers were concerned about Russia’s upgrades of air bases and air defense systems in Crimea, the report said, but added that “China perhaps represents even more of a challenge, as it introduces yet more advanced military systems and is engaged in a strategy to improve its forces’ ability to operate at distance from the homeland.”