Middle East’s Sovereign Investors Recalibrate Strategies

Political and policy decisions have become core drivers of investment strategy, prompting sovereign investors to fundamentally reassess portfolio construction and risk management, according to the 13^th annual Invesco Global Sovereign Asset Management Study.

Geopolitical tensions (84%) remain the dominant short-term risks for sovereign wealth funds (SWFs) and central banks in the region, followed by a fallout from the Middle East conflict (68%).

An overwhelming majority (96%) of respondents believe that geopolitical rivalry will be a key driver of volatility, while 91% expect protectionist policies to entrench persistent inflation across developed economies.

Most notably, 52% of Middle East SWFs now see deglobalisation as a material threat to investment returns, underscoring a marked shift in the market narrative.

Invesco’s survey, a leading indicator on sovereign investor behaviour, draws on the insights from 141 senior investment professionals, including chief investment officers, heads of asset classes, and portfolio strategists, from 83 SWFs and 58 central banks across the world, collectively managing $27 trillion in assets.

One of the key shifts in portfolio construction identified in the study is the greater use of active strategies by respondents.

On average, Middle East SWFs maintain 78% of their equities’ portfolio and 77% of their fixed income portfolio in active strategies. The survey showed that 33% of SWFs in the region were planning to increase active equity exposures over the next two years, with 50% doing the same with fixed income.

While passive strategies continue to provide efficiency and scale benefits, particularly in highly liquid public markets, active approaches are being used to address index concentration risks, navigate regional dispersion, and enhance scenario resilience in an increasingly fragmented landscape. At the same time, portfolio construction decisions such as asset class, geographic, and factor tilts are increasingly viewed as core expressions of active management.

Due to a combination of geopolitical shifts and interest rate normalisation, traditional portfolio construction models are being rethought, with many SWFs turning to more dynamic portfolio approaches that includes more fluid asset allocations, enhanced liquidity management, and greater use of alternatives.

Within this landscape, fixed income has assumed a new importance within SWF portfolios, becoming the second-most favoured asset class behind infrastructure. On a net basis, 30% of Middle East SWFs plan to increase their fixed income exposure over the next 12 months.

Josette Rizk, Head of Middle East and Africa at Invesco, said that amid geopolitical uncertainty and market shifts, investors across the Middle East have been recalibrating their strategies.

“Active asset management is growing in prominence due to its adaptability to a rapidly evolving economic environment. While private credit holds on to its popularity, fixed income has rebounded as the region’s SWFs diversify exposures,” she said.

Private Credit

Private credit continues to gain momentum among SWFs in the Middle East, with 63% accessing the asset class through funds and 50% making direct investments or co-investments. The survey indicates that 50% of SWFs worldwide, including 40% of those based in the Middle East, plan to increase allocations to private credit over the next year.

This growing interest reflects a broader rethinking of diversification as traditional stock-bond correlations erode in a higher-rate, higher-inflation environment.

Sovereign investors are turning to private credit for floating-rate exposure, customised deal structuring, and return profiles that are less correlated with public markets. Once considered a niche asset class, private credit is now viewed as a strategic pillar of long-term portfolio construction.

Focus on China

Meanwhile, China is once again an important focus for 28% SWFs globally and 33% in the Middle East, with 60% of the region’s SWFs expecting to increase China allocations over the next five years. SWFs are increasingly orientating their China strategies around specific technology sectors, such as AI, semiconductors, EVs, and renewables, with 80% of respondents in the region believing the country’s technology and innovation capabilities will become globally competitive in the future.

Rizk said: “The Middle East SWFs are focusing a large proportion of their portfolios on Asian economies. Based on the outcomes of our study, we anticipate rising investment flows between the Middle East and China, with higher growth potential in selected sectors.”

Digital Assets

The Invesco study also revealed that a small but notable increase in the number of SWFs that have made direct investments in digital assets, 11%, compared with 7% in 2022. Allocations are most common in the Middle East (22%), Asia Pacific (18%), and North America (16%), in contrast with Europe, Latin America, and Africa, where they remain at 0%.

For Middle East SWFs, the biggest barriers to investing in digital assets include regulatory challenges (100%) and volatility (86%).

According to Rizk, the investors were increasingly open to exploring the value digital assets that may add to their portfolios. In the Middle East, allocations are growing cautiously as investors balance new opportunities with regulatory challenges and market volatility.

Globally, central banks are simultaneously advancing their own digital currency initiatives, balancing innovation potential against systemic stability considerations.

While no central bank respondents in the Middle East have launched a digital currency yet, 33% are considering it, viewing efficiency in payments (100%) and enhanced financial inclusion (44%) as the biggest benefits of central bank digital currencies (CBDCs).

Role of Gold

Gold continues to play a critical role in this effort, with 63% of central banks in the region expecting to expand their gold allocations over the next three years. Seen as a politically neutral store of value, gold is increasingly viewed as a strategic hedge against risks such as the rising US debt levels, reserve weaponisation, and global fragmentation.

At the same time, central banks are modernising how they manage gold exposures. In addition to physical holdings, an increasing number are turning to more dynamic tools, such as exchange-traded funds (ETFs), swaps, and derivatives, to fine-tune allocations, improve liquidity management, and enhance overall portfolio flexibility without sacrificing defensive protection.