Strategies for constructing an investment portfolio aligned with economic dynamics in the Middle East

The area is witnessing a surge in technological innovation and start-up activity

By Roberto d'Ambrosio

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An aerial view of Dubai. There are a number of investment avenues in the Middle East that can generate strong returns for investors. — File photo
An aerial view of Dubai. There are a number of investment avenues in the Middle East that can generate strong returns for investors. — File photo

Published: Mon 5 Feb 2024, 2:43 PM

Last updated: Mon 5 Feb 2024, 2:44 PM

The Middle East is a region characterised by economic diversity, geopolitical complexities, and unique investment needs. To build an investment portfolio that is well-aligned with the economic dynamics in the Middle East, investors should consider anticipated market trends across various asset classes, including stocks, bonds, and commodities, particularly gold and oil. Additionally, it’s crucial to tailor investment strategies to individual risk tolerance levels and specific requirements.

As we move to analysing the main trends in the Middle East, we must note that the area is witnessing a surge in technological innovation and start-up activity. Investing in global tech giants with a presence in the region may offer considerable growth opportunities.

Looking at local technology companies and start-ups, the investment in this sector must be driven by a thorough analysis of the businesses to invest in, their realistic potential for an adequate demand for their innovative product, their financial viability based also on the available source of funding, especially when it comes to early stage start-ups.

Another big trend in the Middle East is infrastructure development as governments and private developers continue to invest heavily in infrastructure projects, making construction and real estate companies attractive for investment.

Environmental, social, and governance (ESG) considerations have gained prominence in the strategy set out by the Middle East leadership, and rightfully so. Companies with strong ESG practices may perform well as investors prioritise ethical investments.

Investing in the above trends might be driven by investing in single company stocks and to enhance diversification, exchange traded funds (ETFs) or managed funds. For the most innovative part of the portfolio, as start ups are not listed, VC vehicles or direct investment may be considered, but it requires a lot of specific expertise that surely requires expert guidance.

Looking at other forms of investments, government bonds should be a relevant part of the investment portfolio to balance its volatility and stabilise returns. Middle Eastern governments often issue sovereign bonds to fund infrastructure projects and manage budget deficits. These bonds can be relatively safe investments, providing stable returns.

To spice up this part of the portfolio, corporate, high yield and emerging markets bonds can be considered. They add another level of diversification to the portfolio and skew its return potential, as long as the selection of such bonds is done thorough a comprehensive credit analysis to assess default risk and yield potential.

We know how important it is for Middle East investors to have an ethical approach to investment, carried out through Shariah-compliant instruments.

I have recently elaborated on how Islamic finance has greatly evolved in every aspect, becoming an approach to investment palatable not only for investors of Islamic faith, but very well beyond.

Within this cluster, Islamic bonds (sukuk) provide an ethical investment option for Shariah-compliant investors and for all those players valuing its peculiar approach as a value and stability generating investment.

Historically, investors in the Middle East have been and continue to be very attracted by commodities and their market dynamics. Among those commodities, oil and gold are the most sought-after in terms of both returns and hedge against economic and geopolitical turmoil.

Given the region’s significance in the global oil market, Middle East investors can consider energy-related investments from a privileged observatory and possessing critical expertise. Still, the possible high volatility of oil prices needs to be taken into consideration in relation to the individual risk appetite and tolerance.

Gold has traditionally been a safe-haven asset in times of economic uncertainty and a hedge to financial markets’ downturn, high inflation and currency devaluation. While Gold can be approached in a speculative manner, its intrinsic volatility stabilising effects should be privileged.

Roberto d'Ambrosio, Director & CEO, Axiory Global
Roberto d'Ambrosio, Director & CEO, Axiory Global

I have hinted above to the topic of the assessment of the risk appetite and tolerance of the investors. This is crucial to create investment portfolios that can really fulfil the needs and the expectation of the investor.

This aspect must be approached looking at the individual appetite for risk, the complexity of his income and patrimonial status, the specific short-, medium- and long-term goals, his liquidity needs. At the same time, we can generally consider the peculiar approach of investors in the Middle East, which often exhibit a cautious approach to risk, influenced by cultural and economic factors.

We already mentioned Shariah-Compliant Investments and sukuk which, along with certain ethical stocks, will definitely be part of their portfolios.

Long-term family legacy planning is a priority for Middle East investors, which might be catered for by creating trusts and estate plans to ensure wealth preservation and smooth wealth transfer to future generations.

The Middle East is exposed to the uncertainties generated by geopolitical tensions, as we have seen for oil. Diversifying globally and selecting assets less sensitive to regional instability can help mitigate these risks.

All of the above being considered, the investment portfolios will be created and maintained based on the investor risk appetite/tolerance, acting on the asset allocations of various classes, such as stocks, bonds, liquidity and also real estate and alternative investments, looking for as much diversification as possible, both in terms of instruments, sectors and geography.

The lower the risk tolerance, the lower the stake in volatile assets and rigid assets should be, and the higher the stake in safe investments and liquidity,

Highest risk profile might consider investing in hedge funds and digital assets, but always avoiding excesses and keeping greed in check.

In any case, an adequate monitoring and maintenance of the portfolio should always be carried out in order to fine-tune it and reallocate the resources among the different asset classes to maintain its link with the intended risk level and return expectations.

The writer is Director & CEO, Axiory Global

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