< Previous30 AB FINANCE March 2023 FEAT URE | PRIV AT E EQUI T Y The Future of Private Equity in the Middle East To date, there are 27 Sovereign Wealth Funds and 13 pension funds in the Middle East, managing over $4.6 trillion in capital With increased regulation, the region has become an exceedingly attractive investment destination BY JASON COKE With the rise in investment in cryptocurrency and block- chain technology, many are wondering what the future of private equity holds for the Middle East. 2023 is shaping up to be an excit- ing year for private equity in the Middle East. With increased regula- tion, a more open market and access to capital, the region has become an increasingly attractive investment destination. arabianbusiness.com 31 PRIV AT E EQUI T Y | FEAT URE The impact – there is now a concentrated effort to move away from real estate to investments such as consumer services As technology continues to evolve and new opportunities arise, investors are advised to keep their eyes open for potential investments that may provide pro table returns. Despite the current economic chal- lenges experienced in the rest of the world such as the lagging impact from covid and inflation, there are still healthy levels of investment activity in the region. The majority of private capi- tal, held primarily by sovereign wealth wealth funds are doubling down on private equity investing, not to be outdone by the investing activity spurred by international investors focused on cash ow. Looking ahead, it’s clear that this trend of growth will continue into 2023 and beyond - making it a great time to get involved with private equity opportunities in the Middle East. Traditionally, Middle Eastern funds have relied on infrastructure and real estate. However, of late, there has been more of a concen- trated e ort to change away from real estate to investments such as consumer services, healthcare, and technology to name a few. 50 percent of the sovereign wealth funds are reportedly looking to increase investment into private equity funds have been particularly active, with over 50 percent of sovereign wealth funds reportedly looking to increase investment into private equity. In total, there are 27 Sovereign Wealth Funds and 13 pension funds in the Middle East, managing over $4.6 trillion in capital. Sovereign 32 AB FINANCE March 2023 FEAT URE | MA R K ET S Will markets pass the rst test of 2023? Unpredictability is real, and it’s here to stay. 2023 is no exception and with the recent positive surprises in economic data, the current holistic rally in nancial markets could face its rst serious test: is good news bad news? NYSE Unpredictability has become a norm, to such an extent that a new investment era has emerged from the disruptions of the last three years Let’s start by setting the stage. Our recently released 2023 Global Investment Outlook is titled “Adapting to Unpredictability”. Unpredictability has become a norm, to such an extent that a new invest- ment era has emerged from the disruptions of the last three years. “This time is di erent” is usually a very dangerous statement in the investment world. But decade-lasting regimes sometimes really shift. We expect higher inflation and more economic and policy uncertainty ahead, with a shrinking globalisation BY MAURICE GRAVIER, CHIEF INVESTMENT OFFICER, WEALTH MANAGEMENT AT EMIRATES NBDarabianbusiness.com 33 MA R K ET S | FEAT URE and high levels of debt in the backdrop. 2023 is not an exception to unpre- dictability, which affects two very fundamental pillars of the invest- ment landscape: this year is all about the relative trajectories of in ation on one hand, growth on the other, with the central banks’ actions in the middle. Central banks basically ght inflation by pressuring growth, as growth generates jobs, fuelling the risk of a wage-price spiral. The year started with reasons to believe in a perfect scenario. First, in a- tion is receding. It’s not fast enough for central banks to become markets’ best friend again, but still, it’s going down. In addition, early economic data also confirmed a slowdown which was marked enough to support lower in a- tion -and job creations- ahead, but not terrible enough to fuel fears of a global recession, especially as China’s reopen- ing is strong. Alas, unpredictability hit again last week at the heart of this perfect “not too hot, not too cold”, so called “Goldilocks” narrative. Activity indi- cators were stronger than expected roughly everywhere, and it culmi- nated with two astonishing numbers on the US outlook. First, the ISM Services, leading indicator of activity in the most prominent and job intensive sector of the US jumped to 55.2 in January from 49.6 in December, ridiculing the consensus expectation for 50.5. Services in the US are booming. If it wasn’t enough for the pride of econ- omists, the monthly non-farm payroll change, which is the number of jobs being created, came out at 517,000 for January, more than twice December and almost three times higher than the forecast. Investment outlook for 2023 The consequence was immediate: such a hot job market poses a risk to in ation, which justi es a continued pressure from central banks which, in turn, threatens future growth and directly questions the current rally of everything. All asset classes are in the green so far in 2023, and this is, we Maurice Gravier says diversi cation and pragmatism in risk taking is paramount, to adapt to unpredictability the monetary tightening is already behind us, and that it kind of works. The terminal rate (the one at which central banks stop hiking) may be 25 or 50 basis points higher than initially thought, but the big picture is unchanged. Central banks will pause, wait for inflation to come down, maintain high rates until it does, and seeing a resilient economy in the meantime is not that bad and we will soon come back to a Goldilocks situation. It’s a “soft landing” scenario, meaning some status-quo for markets, with of course some short-term volatility. Second option is a hard landing: January strength is short-lived, activity tanks. In ation should follow and central banks will cut rates. This would be di cult for cyclical assets, but safer bonds would do very well. Third option is a central bank’s nightmare: This year is all about relative trajectories of in ation on one hand, and growth on the other believe, the rst serious test of 2023. Markets were not that concerned with the hawkish rhetoric of both the US Federal Reserve and the European Central Banks. With the support of positive economic data, it’s changing, and markets are already reversing their implicit forward-looking views for lower rates later this year. There are several possibilities from here at this stage. First, there are reasons to believe that regardless of the recent economic news, most of 34 AB FINANCE March 2023 FEAT URE | MA R K ET S in ation goes out of control and we may see markets reloading their terri- ble 2022 con guration. Let me be brutally honest: we don’t have the answers. Our last tacti- cal asset allocation committee was the most debated ever. On one hand, valuations from stocks in developed markets re ect a perfect, “soft land- ing” scenario that may or may not happen, which suggests caution, and the current buoyant sequence could be a “bear market rally” if it doesn’t. On the other, momentum is strong, technically speaking, and fundamen- tally, we can’t totally embrace the concept that bad economic news is bad for investments. close to our long-term, quantitatively proven long-term allocations. We favour income from safe sources in developed markets: we are overweight cash in dollars, as well as the quality segments of xed income. By contrast, we are underweight in high yield and DM stocks, because their valuations could not react very well to the “soft landing” scenario being challenged. We look for capital appreciation in stocks from emerging markets, which combine secular growth with more reasonable multiples. More than ever, diversi cation and prag- matism in risk taking is paramount, to adapt to unpredictability. This is where a strong strategic asset allocation is paramount, and we have reshu ed ours to prepare for an era of unpredictability. When the short term is highly uncertain, it’s better not to take radical active deci- sions. Our current positioning is US Federal Reserve Markets were not that concerned with the hawkish rhetoric of both the US Federal Reserve (above) and the European Central Banks 517,000 The monthly non-farm payroll change in January, almost three times higher than the expected forecastAccounts SIMPLER DIGITAL BANKING SERVICES ACROSS THE REGIONNext >