Analysis of Middle East Sovereign Wealth Funds

Middle Eastern sovereign wealth funds (SWFs) occupy a pivotal position in the global financial landscape, wielding substantial capital reserves and exerting significant influence on regional and international markets.

History of Funds

The inception of Middle Eastern sovereign wealth funds traces back to the mid-20th century, coinciding with the region's ascent as a major player in the global oil market. With the establishment of funds such as the Kuwait Investment Authority in 1953 and the Abu Dhabi Investment Authority in 1976, Middle Eastern nations began formalizing their wealth management strategies, aiming to safeguard their resources for future generations.

Middle Eastern sovereign wealth funds typically operate under broad investment mandates, allowing flexibility in asset allocation and investment strategies. While each fund may have its unique objectives and preferences, common investment targets include equities, fixed income securities, real estate, infrastructure, private equity, and alternative investments (Chart 1).

Chart 1 | Sovereign Wealth Funds Assets

Significant Players

The Middle East boasts several prominent sovereign wealth funds that wield substantial financial clout and play pivotal roles in global investment markets. These funds, endowed with trillions of dollars in assets under management, strategically deploy capital across diverse asset classes and geographies, contributing to economic growth and wealth preservation within their respective nations.

Public Investment Fund

Established in 1971, the Public Investment Fund (PIF) plays a central role in Saudi Arabia's economic diversification initiative. The fund pursues investments across a wide range of sectors, including technology, entertainment, healthcare, infrastructure, and tourism. It aims to drive domestic growth, attract foreign investment, and transform the Saudi economy to one that is non-oil dependent (Chart 2).

Chart 2 | Public Investment Fund Growth

PIF invests domestically in Saudi Arabia, as well as internationally across multiple geographies. Its portfolio is subdivided into six categories:

International diversified pool.
International strategic investments.
Saudi real estate and infrastructure.
Saudi development sector.
Saudi equity holdings.
Saudi giga-projects.

Why is the Kingdom investing so heavily in significant projects with big bills? It is to achieve Vision 2030, the plan aimed at reducing the dependence on oil, diversifying the economy, and developing public services sectors such as healthcare, education, infrastructure, recreation, and tourism. PIF’s investments are designed to support these goals by fostering economic growth and creating jobs.

The most significant on the list are the giga-projects (Chart 3). One of the most ambitious is NEOM, a $1.5 trillion megacity on the Red Sea that aims to redefine urban living by integrating cutting-edge technology, sustainability, and innovation. The word is a combination of ‘neo’, meaning new in Greek, and ‘mustaqbal’, future in Arabic, making ‘new future’.

NEOM is situated in northwestern Saudi Arabia, encompassing an area of approximately 26,500 square kilometers. Some of its stated goals are to be one hundred percent fueled by renewable energy, be a technological and innovation hub, and provide unparalleled living standards for its goal of 1.5 million residents by 2030.

Chart 3 | Public Investment Fund Giga-Projects

Abu Dhabi Investment Authority

Established in 1976, its mission is to sustain the long-term prosperity of Abu Dhabi by prudently growing capital through a disciplined investment process (Chart 4).

With assets under management of $993 billion, ADIA has made significant investments across various sectors globally, including landmark real estate developments, infrastructure projects, and strategic equity stakes in leading companies.

Chart 4 | Abu Dhabi Investment Authority

Qatar Investment Authority

The Qatar Investment Authority (QIA) was established in 2005 by the State of Qatar with the primary goal of managing and growing the country’s substantial revenues from its oil and gas reserves. The fund was designed to invest surplus revenues across a broad range of asset classes and geographies, reducing the nation’s dependence on hydrocarbon revenues and building a diversified portfolio of investments. Today, it has around $500 billion in assets.

Kuwait Investment Authority

The Kuwait Investment Authority (KIA) was established in 1953, making it the world’s oldest sovereign wealth fund. The creation of KIA was a strategic decision by the Kuwaiti government to manage the country's oil revenues and to ensure the sustainable and diversified growth of its wealth. It has approximately $923 billion in assets. Initially, the fund was called the Kuwait Investment Board and was headquartered in London, reflecting the Kuwaiti government’s foresight in seeking international investment opportunities early on.

Global Future Outlook

Sovereign wealth funds are expected to continue growing and influence globally. With increasing revenues from natural resources in the Middle East, these funds are likely to see a significant increase in assets under management. However, many challenges remain that must be addressed to ensure a sustainable future for SWFs.

Inflation Rates

First, rates of inflation have reached all-time highs worldwide, and although they have been falling in recent months, they remain higher than usual. This erodes purchasing power and real returns, impacting the ability of sovereign wealth funds to preserve and growth national wealth. To combat this, sovereign wealth funds may need to increase allocations to inflation-resistant asset classes, such as real estate, commodities, and inflation-linked bonds.

Inflation also increases input costs for companies which may be beneficiaries of SWFs, squeezing profit margins and reducing earnings. Funds can sector rotate to companies with stronger pricing power and resistance.

Interest Rates

Interest rates have been steadily increasing to combat inflation (Chart 5). Higher rates typically lead to a reduction in the value of existing fixed-income securities, which can result in capital losses for sovereign wealth funds. To mitigate interest rate risk, SWFs may adjust their bond holdings towards shorter-duration bonds, which are less sensitive to interest rate changes.

Similarly, elevated rates can decrease asset valuations as the discount rate and cost of capital increases (Chart 6). This can compress stock prices, particularly growth stocks that are sensitive to changes due to their cash flows being expected much further in the future.

Chart 5 | Saudi Arabia Policy Rate

Chart 6 | United States Inflation and Interest Rates

Conclusion

Sovereign wealth funds play a pivotal role in managing and growing national wealth, particularly in the Middle East with substantial reserves from oil and gas revenues. Assets under management continue growing and asset classes are being diversified.

As long as interest rates remain steady and inflation stabilizes, the future looks positive for sovereign wealth funds. Prudent management, strategic diversification, understanding of economic indicators, and adapting to changes will determine their success in preserving and growing generational wealth.