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The beginning of 2022 has proven to be extremely challenging for the global fixed income markets. Investors, consumers, and businesses alike have had to deal with the strongest inflationary pressures in 40 years. These pressures have been made worse by a commodity price shock, geopolitical uncertainty resulting from the conflict in Russia and Ukraine, and tighter global financial conditions as a result of the switch to less accommodative central-bank monetary policies. While the market turmoil of this year has led to negative total returns across most fixed income sectors, it has also created lucrative opportunities for investors with longer-term time horizons.
Fixed Income Market Outlook – Key Insights for 2022
2022 has been a year dominated by volatility for markets. The root of this market volatility is attributed to inflation uncertainty, which has resulted in policy uncertainty. The U.S. Federal Reserve (“Fed”), which was once the leader of “team transitory”, is now shifting its strategy. Heading into the second half of the year, the direction of rate policy will have significant implications for market returns, recession risk, long-run inflation, and the durability of the 60/40 portfolio. Although the US Federal Reserve’s underlying hawkishness is still present, a turn is beginning to become apparent.
For the time being, it is anticipated that the Fed will keep up its front-loaded hiking cycle. The prospects of developed markets edging closer to a recession are becoming more likely as global macroeconomic fundamentals continue to deteriorate. The probability of a hard landing continues to be the base scenario. In order to re-anchor dangerously growing inflation expectations, central banks will end up pushing their respective economies into recession either accidentally or on purpose.
The Fed is continuously arguing for front-loading interest rate increases as it tries to bring inflation under control. On Friday, August 26th, at the Jackson Hole Economic Symposium, the Fed’s Chairman Jerome Powell ended speculation of a Fed lean towards cutting rates to aid the economic recovery in the short to medium term. To ensure stability in price, a restrictive strategy would have to be adopted for an extended period of time. The Fed Chairman confirmed that the department would utilize everything in its inventory to decrease inflation, which has elevated to a level that has not been seen in the past 40 years. Even with four consecutive interest rate increases, which totaled up to 225bps this year, Powell said that they will not stop.
Fed Chairman’s Comments Move Fixed Income Markets
According to Trackinsight’s fund flow data, Europe-listed fixed income ETFs attracted a total of USD$335 million of investor capital between August 22nd to August 26th, which means that this is the sixth consecutive week that has experienced net inflows, and the second week that has experienced average returns that are negative. Powell has been clear with regard to price stability and fighting inflation and was quoted saying that “The Federal Open Market Committee’s (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal.” He also stated that without price stability, the economy will not be able to achieve a sustained period of strong labor market conditions that benefit all.
Powell’s hawkish statement that restoring price stability will probably require maintaining a restrictive policy stance for some time, even at the expense of slowing economic growth, echoed across the markets with the S&P 500 falling from 4,197.16 to 4,057.99, a 3.32% drop and the largest for several months. On the fixed income side, U.S. Treasuries rose in anticipation of ever-increasing interest rates, and it is pertinent to note that the 2-year US Treasury jumped more than the 10-year Treasuries. Government Bond ETFs also reacted positively to the news attracting USD$350 million of net inflows, while in sharp contrast corporate debt ETFs lost US$195 million over the week across all credit ratings, the largest outflows in the fixed income sector.
From a credit rating perspective, investment grade bond ETFs took the major chunk of inflows, having brought in USD$850 million of investor cash. In comparison to this, their high-yield counterparts registered almost USD$118 million in net outflows for the same period.
Last week’s flow leaders included the iShares Core € Govt Bond UCITS ETF (IEGA). The fund was able to lure USD$85 million of net inflows, meanwhile holding funds of USD $3.8 billion of assets under management. The fund follows the performance of an index that is composed of Eurozone investment-grade government bonds.
Additionally, the Amundi Index Euro Corporate SRI 0-3 Y UCITS ETF (ECRP3) was attractive to European investors for the fourth consecutive week. It attracted USD$65 million of investor capital as compared to the previous week’s USD$0.5 million. ECRP3 allows its investors to have access and view of a range of investment-grade, euro-denominated bonds. However, it excludes issuers that are involved in alcohol, tobacco, gambling, military weapons, nuclear power, adult entertainment, civilian firearms, genetically modified organisms, thermal coal, and oil sands.
On the other hand, bond ETFs saw large outflows including the iShares Core € Corp Bond UCITS ETF (IEAC) and SPDR Bloomberg Emerging Markets Local Bond UCITS ETF (EMDD), losing USD$300 million and USD$113 million, respectively.
Vulnerability of the “Diversified” 60/40 Portfolio
Typically, when growth assets, like stocks, sell off due to an economic downturn, safer assets, like bonds, appreciate as investors seek stability. While stocks tend to suffer in a recession due to the decline in economic growth, bonds can rally because the US Federal Reserve typically cuts interest rates to support the economy. Bond yields decrease while bond prices increase when interest rates are reduced. This acts as a portfolio’s shock absorber, reducing the impact of dropping stock prices on overall returns. For many years, the basis of “diversified” 60/40 portfolios has been this stock-bond balancing act. A rising level of inflation, however, limits the Fed’s ability to support the equities markets by cutting rates, thereby rendering the “Fed put” ineffective.
Due to this perplexing combination, standard 60/40 portfolio investors are exposed. Bond prices have only increased while stocks have declined three times since 1929. Except for the years 1931, when Britain abandoned the gold standard (which resulted in falling equities but rising interest rates to protect the currency), and 1941, when the US entered World War II (leading to rising inflation and falling stocks), 1969 stood as the exception that proved the rule for reliable stock-bond diversification.
The reasons for losses in that period are similar to today, with rapidly rising inflation unleashing a Fed tightening cycle that eventually resulted in recession. That time showed how bonds may be a terrific stock diversifier, unless stocks are declining owing to inflationary worries.
Fidelity International
According to a report by Fidelity International on fixed income perspective, at the September 15th FOMC meeting, a 75bps rate hike is likely and the terminal rate might have risen to 4% from 3.25-3.5%, with any pivot, now pushed out later in the first half of 2023.
Given the extent of the debt in the system and the fact that quantitative tightening is still escalating, draining US$95 billion a month from its $9 trillion balance sheet, further tightening financial conditions, the monetary tightening by the Fed to re-anchor inflation expectations runs the risk of sending its economy into recession. The result will probably be looser policy to boost economic growth the following year. Given the global demand for US dollar debt refinancing, it is important to monitor dollar liquidity conditions under US quantitative tightening. This isn’t a prominent risk now and the Fed has tools to fight this.
According to the report, in core European bonds, we are also long duration. The European economy is in a difficult situation and is likely to enter recession soon, whatever the ECB does. Adding monetary tightening to the mix could accelerate the downturn, and authorities may reverse course sooner than the market might think. The report suggests that investors should prioritize protection in this recessionary environment. The report also highlights that Fidelity favors investment-grade bonds, where valuations remain relatively attractive, especially in Europe. After Powell’s remarks, investment grade yields scarcely changed, which may be an indication that hawkish sentiment has peaked. High-yield spreads, in contrast, have not yet fully accounted for the danger of a harsh landing. One-year defaults in US high yield markets, for instance, predict a default rate of just 2.3%, which is consistent with a fairly shallow recession.
According to the investment firm, now is the moment to play it safe and invest in investment-grade markets rather than high yields.
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]]>The post Investments of the Future” summit took place earlier this month. first appeared on Oman Investment Fund.
]]>This month, OIF hosted one of its most important events of the year – “Investments for the Future”. This three-day conference held in Dubai, gathered about a hundred active participants from all over the world, taking part in various events both online and in-person. The speakers discussed the key events of 2021 – the year, that brought major changes for the world economy, and outlined the prospects for the year to come.
During the three days of the conference, participants could enjoy a rich and eventful program, including panel discussions, topical sections, and presentations. Modern technology allowed us, the organizers, to create an equally valuable experience for online and in-person participants.
One of the key events of the conference was the presentation of Albert Martinson, a renowned specialist in the area of high-tech investment. In his speech, he offered the audience a deep insight into the perspectives of the future of the economy and pointed the most important strategies, that will allow an investment fund to remain effective in the long run.
The main feature of the conference was the diversity of the speakers. While preparing the event, we followed the same principle, as with building our company itself: we unite people of different cultural and professional backgrounds and bring them to work together for the common goal. Thus, the “Investments for the Future” conference is always remarkable because of the variety of different viewpoints represented.
The conference is part of our work on supporting connections between investors and other professionals from all over the world, which is, as we believe, is an essential part of ensuring the long-term value of our efforts.
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]]>The post Shaping Tomorrow Conference first appeared on Oman Investment Fund.
]]>OIF Launches Annual “Defining the Future” Conference
OIF is proud to announce a new initiative—an annual conference co-organized with several leading research and investment firms. This event is designed to bring together professionals from diverse backgrounds, experiences, and cultures to exchange ideas, explore key global challenges, grow professional expertise, and foster sustainable economic development.
The inaugural “Defining the Future” conference is scheduled for next month and will be held annually going forward. The conference’s themes will evolve each year to reflect current scientific, technological, and economic trends that impact everyday life and investment thinking. This year’s program includes:
Panel Discussions:
The Future of Blockchain Technologies
Sustainable Energy Generation
Emerging Challenges in the Computer Industry
Innovations in Public Health
Focused Sessions featuring 4–5 paper presentations each:
Investment Strategies in a Changing World
Responsible Investment
New Approaches to Long-Term Planning
Additional Highlights:
Networking sessions and open-floor discussions
Keynote address by Canadian investment strategist Alfred C. Holt
The five-day event will take place at a state-of-the-art venue in Dubai’s central district and will follow a hybrid format to accommodate both in-person and virtual participants.
Ryan Smith, Head of Innovative Investments at OIF, shares:
“We believe that fostering a space for meaningful exchange and cross-disciplinary collaboration is essential to what we do. ‘Defining the Future’ is not just about keeping pace with change—it’s about cultivating the environment where new ideas are born and connections are made.”
“Defining the Future” is set to become a signature event for OIF—an annual tradition dedicated to continuous learning, impactful dialogue, and inclusive growth.
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]]>The post Shift to Smart Cities Accelerating Globally as Climate Challenges Amplify first appeared on Oman Investment Fund.
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Globally, countries have set aggressive targets for reducing greenhouse gas emissions. Energy use will need to be reduced significantly in cities if such goals are to be achieved. Currently, 55% of the world’s population lives in urban areas, and the share is expected to grow to 68% by 2050, according to the UN Department of Economic and Social Affairs. Cities are the main source of economic activity, energy consumption, and greenhouse gas emissions worldwide. For urban centers to reduce emissions significantly, both energy use must be reduced and intermittent renewable energy must be taken advantage of. These objectives will be achieved largely through the development of “smart cities”. This article focuses on IoT-related smart city initiatives,
which encompass a wide range of initiatives. Through the use of new technologies and the automation of processes, these initiatives can help cities become more efficient.. It may seem impossible to achieve full smart city functionality, but some urban centers are already implementing smart technology. Improvements in mobility can already be seen in Singapore, which is often regarded as the world’s best smart city. Beeline is an application for crowdsourced bus services that was introduced in 2015. Private bus operators are given anonymised data by the government to suggest new routes based on community demand. Consequently, public transportation becomes more efficient and the use of private cars decreases.
According to the United Nations Development Programme (UNDP), cities are responsible for 70% of global greenhouse gas emissions. Additionally, they are highly vulnerable to many of the impacts of climate change they contribute to, such as heat stress, flooding, and health emergencies. In order to achieve Sustainable Development Goal 11 (SDG 11), cities must be made more resilient, sustainable, inclusive and safe.
Role of Telecom in Development of Smart Cities
In smart cities, many methods for reducing greenhouse gas emissions rely on sensors either for recording and relaying real-time consumption data or for detecting resident activities. The central processing system must be connected to most of these sensors in order to analyze data and automate processes. Many of these tasks can be accomplished through fixed and mobile telecommunications networks. There are a number of possible use cases where telecom networks can provide connectivity at a lower cost than custom-built networks. Let’s examine the role mobile networks play in supporting smart city development.
Many IoT applications can already be supported by existing mobile networks with only minimal enhancements. An IoT application based on narrowband IoT (NB-IoT) can be supported by a modified version of 4G. At some point, however, 4G networks will no longer be able to support smart cities. This is where 5G technology comes in, which will provide the following improvements over 4G networks (among others):
- Capacity and speed improvements
- The ability to support a greater number of connected devices (including Internet of Things devices) will help drive down the cost of sensors through economies of scale
- As a result of lower power requirements, sensors will have a longer battery life
- A higher level of reliability
- A reduction in latency (also called “quicker response times”)
- Offering different levels of quality of service to different users via virtual “Network Slicing”
- A reduction in the mobile network’s energy consumption
As a result, policymakers must facilitate the timely rollout of 5G to maximize the reduction in greenhouse gas emissions that smart cities can achieve.
Santiago De Chile’s Electric Buses
Chile’s capital, Santiago de Chile, has bought 455 electric buses over the past few years, and plans to buy nearly 800 by 2020. As e-buses are emission-free, they reduce air pollution and its effects on human health and productivity. In Santiago’s public transportation system, air conditioning and a quieter ride are also popular features. A major transport axis in Santiago is now home to Latin America’s first “electric corridor,” according to the International Energy Agency (IEA). It is only served by e-buses and consists of bus stops featuring solar panels that power free Wi-Fi, USB charging and LED lighting – making it an even more attractive network for e-bus users.
Additionally, the e-buses reduce the local government’s operational expenditures. Compared with diesel-powered buses, they are 70% cheaper to operate and maintain, which offsets their higher purchase cost, which is nearly double. Additionally, these huge reductions could also lead to lower fares – encouraging more people to use public transportation. Chile has set electrification targets for both private and public transport, and has made significant efforts to increase demand for electric vehicles and charging infrastructure. A tender has been issued for the procurement of 2,000 more e-buses by Chile’s transport ministry, and the project is set to be extended to other cities.
According to the IEA, South America is a major growth market for e-buses, despite China accounting for more than nine out of every ten electric buses registered in 2019. Chile has the largest electric bus fleet, but Argentina, Brazil, Colombia, and Ecuador also have electric buses.
Abu Dhabi’s Innovative Farming Methods
Urbanization will increase the number of urban dwellers, which will exacerbate the challenge of feeding them. It is estimated that 80% of all food will be consumed in cities by 2050. It may be possible to grow enough food hydroponically in areas where space is limited or the climate is unfavorable for traditional farming. Water-based hydroponics involves feeding plants with nutrient-rich water instead of planting them in soil. Hydroponically farmed plants have a smaller footprint and can be stacked vertically since their roots don’t have to burrow into the ground.
Compared with traditional farming methods, hydroponic farming can increase yield by 10 percent per hectare by carefully controlling the plant’s environment and nutrient intake. Furthermore, it makes better use of resources, reducing waste, water consumption, pesticides and fertilizers. Since they are indoors, they are less susceptible to pests and weather events, and crops can be grown nearby. Reports from the UN suggest that this can reduce food miles and emissions associated with them.
The Abu Dhabi government is now providing $100 million for the construction of a vertical farm of over 8,200 square meters for both research and development and commercialization. Funding from the Abu Dhabi Investment Office is intended to turn “sand into farmland”, boost local food production, and accelerate the growth of agricultural technology. There will be four vertical farming companies at the facility, including one that will cultivate tomatoes indoors, one that will develop irrigation systems, and one that will conduct research and development. Globally, vertical farming projects are underway, including in Dubai, which recently opened its first in-store hydroponic farm.
Mexico’s Insured Coral Reefs
Adding natural solutions to a city’s sustainable infrastructure can help mitigate climate risk. For example, coral reefs serve as natural barriers against ocean surges and flooding. It is possible for them to absorb the same amount of wave energy as seawalls and breakwaters, which are not as durable. According to the UNDP report, reefs and other natural defenses are less expensive to maintain than man-made solutions. According to the report, 20 percent of reefs have been lost globally and 15 percent are in danger, and funding for their restoration and maintenance is limited. In addition, such initiatives are rarely undertaken.
As a natural defense and a source of income for coastal communities, the UNDP is now piloting an insurance scheme in Mexico to protect and boost the Meso-American reef – the second largest in the world. The Reef2Resilience fund is similar to a trust fund for local businesses. The fund serves two purposes. In order to provide better natural protection, it restores and maintains the reef. It also pays for catastrophe insurance to ensure that the coral reef and its surrounding ecosystem recover quickly after a natural disaster, ensuring future protection and protecting coastal communities’ livelihoods. There is a possibility of extending the project to the Caribbean and Asia, as discussions are underway.
Smart Cities of Asia: Vietnam’s Challenge
A central feature of the ‘smart city’ concept has been a strong belief that technology can improve people’s lives. Technological advancements, internet penetration, and the urbanization of the world’s population have all grown over the last couple of decades. With the dawn of the twenty-first century, it’s becoming clear that the real value of those investments in technology is not just about boosting wealth and opportunity, but also about combating climate change.
Cities and communities around the world face existential threats in this time, so the word ‘smart’ has become increasingly important as data and digital services allow them to model and respond to threats such as flooding and extreme heat, and how these affect infrastructure and vital services.. At the COP26 climate summit in November 2021, countries had an opportunity to measure their progress towards climate change goals, make larger commitments, and discuss future strategies. Transitioning from fossil fuel-based energy to renewables at scale is perhaps one of the biggest challenges facing every country. A number of countries, including Vietnam, have committed to phase out coal use, which is currently responsible for 35% of the country’s energy use. By making this decision, the country will expand into renewable energy at a rapid pace, which will have major implications for its existing energy grid. For renewable energy sources, such as solar and wind, to be effectively implemented, grid operators must be able to predict and manage both supply and demand. Urbanization and an 8% increase in energy demand between 2021-30 compound the problem.
As a result of its dependence on coal, and some concerns regarding energy security, Vietnam has a deep understanding of coal. Renewable energy must be developed, but existing grids must not be overburdened. The concept of digital in the context of smart cities extends beyond the application of technical solutions and upgrades. The energy supply chain will also need to be digitised, which will require time and incentives, in a very traditional industry. To motivate international investment in the sector, Vietnam will have to align its own practices with those of other countries in order to support the power purchasing aspects of renewable energy systems like off-shore wind. There is a huge potential for Vietnam’s off-shore wind sector to benefit from this capital movement. Investing in smart cities that prioritize clean energy and improve national resilience is both beneficial on its own and helps build foreign direct investment as well.
5G Expansion Requires Policy Changes
Policy intervention is likely to be required to help fill potential gaps in 5G provision needed for smart cities to fully develop. City areas, where operators will densify their networks, will have a higher demand for sites that can host 5G infrastructure – probably small cells. As a result, access issues arise. Deploying multiple networks can also be expensive. It is possible to deploy a so-called ‘neutral host’ model in order to fill gaps in 5G coverage without undermining the dynamics of competing national network operators. There may be a need for some policy intervention in this situation. The public sector can also play a role in ensuring that 5G is adopted early. Economies of scope will be generated in the use of 5G as a result of the proliferation of use cases.
New government models, known as smart government models, have, however, been created. Sensors, smart traffic lights, and public internet access points have been installed in smart cities as the first steps in their development. The ecosystem, however, has become more complex over time. The cornerstone of a smart city would be smart government. In order to achieve long-term, comprehensive urban development, we need to move from the old smart city debate, understood by using technology to develop urban centers, to one based on smart governance.
It is anticipated that smart city models will also serve as a catalyst for enabling technologies related to various strategies and resources in the future, including smart and efficient public service management, such as lighting, waste collection, and traffic management, which will have a direct impact on reducing energy consumption and greenhouse gas emissions. The citizens of a city are also crucial to the development and creation of smart or smarter cities. As a solution to climate change, it is necessary to foster awareness of the need for greener and more efficient cities.
In addition, public administrations should conduct a joint analysis with the economic sectors regarding how climate change will affect, in order to develop a common approach to combat the consequences arising from different scenarios. In order to achieve a low carbon economy, energy companies must continue reducing their carbon footprint in electricity generation, fostering cleaner fuels, and employing new technologies. Consumption habits and ways of living must be changed by citizens. For example, it is important for citizens to change the way they commute, moving towards clean and shared transport that contributes to saving and efficient travel. It is also important to separate living standards from energy consumption, and to adopt new technologies and developments to make living more efficient and environmentally friendly.
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]]>The post OIF launches a dedicated ESG Investment Department to drive sustainable finance. first appeared on Oman Investment Fund.
]]>Oman Investment fund Launches ESG Investment Department to Strengthen Sustainable Finance Strategy
Muscat, Oman, 5 July 2022 – Oman Investment fund (OIF), one of the world’s largest independent global investment funds and asset managers, has announced the launch of its ESG Investment Department, reinforcing its commitment to ethical and sustainable investing.
“Investing in initiatives that generate not only profits but also long-term positive impacts for society has always been a core value for us,” said Eustace Osborn, newly appointed Head of the ESG Investment Department. “With the launch of this dedicated division, we’re formalizing our approach to ESG investing—an area that has rapidly gained prominence across global finance. ESG stands for Environment, Sustainability, and Governance, and it reflects a shift in focus from short-term gains to long-term, responsible growth.”
Osborn emphasized that while OIF has long applied similar principles when selecting investments and partners, the new department will bring a more systematic approach to evaluating and incorporating ESG standards. “Today, ESG strategies are no longer niche—they’re practical, necessary, and increasingly profitable. We’re seeing more funds on the market that prioritize transparency, environmental responsibility, and governance ethics. These companies often show stronger long-term potential and resilience.”
Key Functions of the ESG Investment Department:
Developing comprehensive ESG rating methodologies based on global frameworks and OIF’s proprietary research.
Conducting in-depth studies on green and ethical investing to continually evolve and refine the fund’s strategies.
Integrating ESG principles into OIF’s overarching long-term investment framework.
Tracking local and global ESG trends to identify high-potential, values-aligned opportunities.
Providing expert guidance to clients seeking to align their portfolios with sustainable and ethical investment standards.
“Our belief is simple,” added Osborn. “For a business strategy to be future-ready, it must consider the social and environmental implications of its investments. This new department will give us the tools and insights needed to pursue a thoughtful, sustainable investment path that creates consistent value for our clients.”
About Us
The Oman Investment Fund is a sovereign wealth fund, established in 2006 in accordance with a royal decree of His Majesty the Sultan of Oman and listed in the Omani Stock Exchange. The group owns and operates several subsidiaries in diverse sectors. Historically, the group’s focus has been on B2B operations.
OIF’s subsidiaries are a mix of organically grown enterprises and international partnerships. Our brands have an established presence and a record of accomplishment in the Omani market, serving flagship projects, customers and facilities in the private and public sectors.
Through our subsidiaries, we add sustainable value to our shareholders with prudent management, diversification and agility. For our customers and partners, we work tirelessly to maintain trust, satisfaction and reliability. Our activities drive the long-term growth and development of our subsidiaries while fresh opportunities in Oman and overseas are sought.
We aim to become the leading catalyst for economic transformation in Oman, establishing the Oman Investment Fund as a key pillar of sustainable development and innovation. By providing strategic investments and funding opportunities with a long-term focus, we aim to strengthen Oman’s position as a global economic player. As the sole financier of the Oman Future Fund, we are committed to building a diversified, future-ready economy that fosters entrepreneurship, creates jobs, and enhances the quality of life for Omani citizens, ensuring a prosperous and sustainable future for generations to come.
CONTACT
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GLOBAL HEADQUARTERS
Oman Investment Fund Bulding, Al Noor Plaza, Al Bashair Street, Madinat Sultan Qaboos,Muscat, Oman.
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]]>The post Shaping Tomorrow: Investing in the Future of Global Health first appeared on Oman Investment Fund.
]]>Investing in the Future of Health: OIF Supports Breakthroughs in Immunity Enhancement
At Oman Investment fund (OIF), we invest across a broad spectrum of economic sectors — but every investment decision is guided by a unifying principle: we choose companies, industries, and technologies that demonstrate the potential to endure and enhance the quality of life for future generations. Each investment opportunity is carefully assessed by our expert team for long-term value, sustainability, and impact.
We are excited to announce a new addition to our investment portfolio: a promising and innovative start-up in the field of Bionomic Medicine, focused on advancing human immune system enhancement.
Doris Benson, OIF’s healthcare technologies expert, explains the importance of this area of research:
“Scientific research identifies two primary types of immunity: humoral and cell-mediated. While humoral immunity (antibody-mediated) is effective against bacterial infections, long-term protection from viral diseases often depends on cell-mediated immunity. This explains why many people contract illnesses like chickenpox only once in their lifetime.
However, for many viral diseases — including some of the most dangerous — the development of lifelong immunity through preventive treatments remains an unsolved challenge. Bionomic Medicine is at the frontier of addressing this. At OIF, we believe that supporting this research is crucial for the advancement of public health, and we are confident our investment will contribute meaningfully to these efforts.”
Ryan Smith, Head of the Innovative Investments Department at OIF, adds:
“This initiative is part of our broader commitment to support high-impact research across a variety of emerging fields. The global focus on immune resilience, especially in light of recent events, has made it clear that innovation in healthcare is not just important — it’s imperative.
By investing in Bionomic Medicine, we’re aligning ourselves with a technology that not only holds promise for improving global health but also offers strong long-term investment potential.”
Our global research and investment teams continuously analyze markets around the world, seeking out next-generation companies with innovative solutions that align with our vision of sustainable and forward-looking growth.
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]]>The post Interest Rate Peaks and Plateaus: Implications for Fixed-Income and Equities first appeared on Oman Investment Fund.
]]>Interest Rate Peaks and Plateaus: Implications for Fixed-Income and Equities
Macroeconomic factors, particularly global peak interest rates, continue to dominate the financial landscape in 2024. Rates are at multi-decade highs due to central banks’ strict tightening measures in major economies. These elevated rates, alongside expected stabilization, are impacting fixed-income and equity markets, requiring investors to adjust their strategies. This report utilizes data from leading financial firms such as BlackRock, McKinsey, and Bloomberg to assess the effects of high and steady interest rates on the fixed-income and stock markets.
Interest Rates Outlook for 2024
Interest rates have surged to historic highs following aggressive hikes by the European Central Bank (ECB), the U.S. Federal Reserve, and other institutions. For instance, the Federal Reserve’s policy rate is now the highest since 2001, ranging between 5.25% and 5.50% (Bloomberg, 2024). With inflationary pressures only recently easing, they remain above central bank targets, maintaining a period of elevated rates. McKinsey (2024) predicts that central banks will maintain these high rates for an extended period to manage inflation. The ECB has also kept its deposit rate at 4%, as Europe faces structural inflation from energy and supply chain issues.
Impact on Fixed-Income Markets
Opportunities in Short-Term Bonds
High interest rates have revived the appeal of short-term fixed-income instruments. With yields surpassing 5%, Treasury bills and investment-grade corporate bonds now present a low-risk investment option (BlackRock, 2024). For instance, US 2-year Treasury bonds yield 5.2%, the highest since 2006.
Investors have moved capital from stocks to fixed income, with bond ETFs seeing net inflows exceeding $200 billion by 2023 (Bloomberg, 2024). Short-duration bonds are less sensitive to interest rate changes than longer-term assets, making them more attractive to investors.
Challenges for Long-Duration Bonds
High yields have increased the pressure on long-term bonds. The difficulties brought on by high discount rates are reflected in the 8% decrease in the Bloomberg U.S. Aggregate Bond Index over the last 12 months.
However, experts suggest that recent dips have generated opportunities for investors with longer time horizons. According to McKinsey’s 2024 report, when interest rates level or even drop in late 2025, long-term bonds might experience significant capital gains.
Corporate Debt Restructuring
Corporate balance sheets are being pressured by rising borrowing costs, especially in markets for high-yield debt. Default rates on speculative-grade bonds have climbed to 4.5%, up from 2.8% in 2022. This has resulted in increasing monitoring of credit quality and a preference for investment-grade assets.
Implications for Equity Markets
Valuation Adjustments
Higher interest rates have rebalanced equities prices, particularly in growth industries like technology. The NASDAQ Composite, which is disproportionately weighted toward growth firms, has lagged larger indices, returning a minimal 5% year to date (BlackRock, 2024).
The equity risk premium (ERP) has decreased as risk-free rates have risen, forcing investors to expect stronger profit growth to justify prices. According to McKinsey’s analysis, industries with consistent cash flows, such as utilities and consumer staples, have grown in popularity.
Sector Rotation
Growth equities are being replaced by value stocks in a high-rate environment. Financials, energy, and industrials have done well due to strong demand and increased profit margins. For example, the S&P 500 Value Index is up 12% in 2024, while the S&P 500 Growth Index is up 6% (Bloomberg, 2024).
Interest in dividend-paying equities has also risen. As Treasury rates become competitive for the income-oriented investor, corporations with large and consistent dividend payments, such as Procter & Gamble and Johnson & Johnson, have seen significant inflows of capital.
Private Markets and Alternatives
Increasing rates of discount have become a challenge for private equity and venture capital firms. Real assets, like real estate and infrastructure, are in vogue because they can hedge against inflation. The 2024 forecast by BlackRock points out the stability of private lending, which yields higher returns in the current environment.
Regional Perspectives
United States
At the center of the global interest rate narrative remains the U.S. market. However, despite its strong resilience, the global interest rate is having exporters and leveraged enterprises adversely impacted by the strong dollar and high borrowing rates.
Europe
The MSCI Europe Index is up only 3% year-to-date, which implies that European stocks have outperformed their U.S. counterparts. Defensive industries are becoming more attractive due to the ongoing volatility created by energy prices and geopolitical uncertainties (McKinsey, 2024).
Emerging Markets
Countries that export commodities, such as South Africa and Brazil, are making profits due to increased demand and good prices. Default concerns for Turkey and Argentina, which have heavy dollar-denominated debt, are on the rise (Bloomberg, 2024). Therefore, emerging markets are more of mixed signals rather than indicating one thing.
Investor Strategies for 2024
Diversification Across Asset Classes
Investors should diversify their holdings into fixed-income, stocks, and alternative investments. Dividend-paying equities and high-quality bonds could provide stability and income, while private credit and real assets offer growth opportunities.
Focus on Quality and Cash Flow
Stocks are probably going to fare better for companies that have a solid balance sheet and a predictable cash flow generator. Municipal and investment-grade bonds may offer relatively stable fixed-income solutions.
Hedging Against Inflation
Commodities, real estate investments, and inflation-linked bonds can all serve as good hedges. Inflation insurance is still necessary, according to McKinsey (2024), since future rate fluctuations are unpredictable.
Historical Comparisons: Lessons from Previous Rate Cycles
Peak interest rates in 2024 reflect comparable situations from previous decades, providing insightful information for current approaches. Historical similarities may be seen, for example, in the strong monetary tightening that took place during the early 1980s under Federal Reserve Chair Paul Volcker.
The Federal Funds Rate reached an unprecedented 20% peak at that time, which was symbolic of the extreme measures occasionally needed to counteract chronic inflation. Even while rates in 2024 are comparatively mild, the persistence of high rates shows clear similarities, indicating that longer plateaus could have a greater effect on long-term investing patterns.
Following these cycles, demand spiked for commodities and energy while industries like manufacturing and real estate faced severe challenges. Similar themes may be forming for investors now, but with the extra complexity of an economy that is internationally connected.
Sector-Specific Impacts: Beyond Traditional Narratives
Technology and Innovation
As per new trends, high-growth technology stocks are facing valuation pressure. Meanwhile, some sub-sectors like artificial intelligence (AI) and quantum computing proved themself to be more stable. This reflects that discount rate changes are less likely to impact companies with innovative, revenue-generating AI models.
While high-growth technology stocks face valuation pressure, certain sub-sectors, such as artificial intelligence (AI) and quantum computing, are proving resilient. Companies with innovative, revenue-generating AI models are less sensitive to discount rate changes, positioning them as outliers in an otherwise strained sector.
A Bloomberg report claims that investments in AI have increased by 15% annually, contrary to general trends in the IT sector.
Infrastructure and Utilities
Stable, high-rate settings continue to benefit infrastructure and utilities. Due to its consistent revenue flows and resistance to inflation, renewable energy infrastructure has seen an increase in capital allocation from sovereign wealth funds, such as the Dubai Investment Fund. Global infrastructure spending is expected to increase by 9% in 2024 (McKinsey, 2024).
Energy and Commodities
As investors seek to hedge against geopolitical risks and inflation, commodity markets are bouncing back. Valuable metals such as gold and silver have seen a 12% price gain this year due to a drop in confidence for the currencies and an increase in demand for safe-haven assets. Moreover, natural gas and oil remain the core building blocks of energy portfolios, especially with ongoing geopolitical tensions in the Middle East and Eastern Europe.
Cross-Border Capital Flows: Emerging Market Dynamics
Cross-border capital flows have been redirected towards more stable developing markets as a result of industrialized nations’ sustained high interest rates. Strong domestic development stories and a decreased reliance on debt denominated in dollars are drawing more foreign direct investment (FDI) to countries like Vietnam, Indonesia, and Kenya.
Vietnam’s industrial exports, for instance, have increased by 18% a year, taking advantage of global supply chain realignments. At the same time, Kenya has become a hub for venture capital, with inflows of over $3 billion in 2023 due to its focus on fintech and mobile banking (Bloomberg, 2024).
Geopolitical Influences on Rate Policies
Across all areas, geopolitical issues continue to influence monetary policy. Global commerce and investment are becoming more unstable due to the South China Sea tensions and the Russo-Ukrainian war. Forecasts for rate plateaus are becoming more difficult as central banks increasingly take geopolitical stability into account when determining policy.
The cautious approach taken by the European Central Bank is a reflection of its dual task of preserving monetary stability and assisting countries that are very vulnerable to fluctuations in energy prices. Asian nations, however, are taking a variety of strategies. India has implemented modest rate rises to reduce imported inflation, while Japan is steadfast in its commitment to low rates under its yield curve management strategy.
Behavioral Shifts Among Institutional Investors
Strategies for institutional investments are evolving due to sustained high rates. Pension funds, endowments, and sovereign wealth funds are using barbell strategies to balance short-duration, high-yielding assets with long-term investments expected to appreciate.
Interest in real estate investment trusts (REITs) focusing on healthcare and logistics has also risen. For instance, logistics REITs saw a 7% total return increase in 2024, driven by e-commerce demand and supply chain shifts (BlackRock, 2024).
Monetary Policy Divergence: Implications for Currency Markets
Currency market volatility is escalating due to differing monetary policies across major economies. The U.S. dollar remains stable due to high rates, while currencies like the Chinese yuan and Japanese yen have weakened. Currency-hedged equity strategies have gained popularity, with net inflows exceeding $25 billion in H1 2024 (McKinsey, 2024).
The euro has remained steady due to the ECB’s hawkish policies, but higher borrowing costs in peripheral economies like Greece and Italy pose risks for the Eurozone.
Emerging Themes in Fixed Income and Equities
ESG Integration in Fixed Income
ESG factors are gaining traction in fixed-income markets. For instance, government and corporate sustainability commitments led to a 20% increase in green bond issuance in 2024, aligning long-term climate goals with investments.
Small-Cap Equities Resilience
The Russell 2000 Index outperformed the S&P 500 by 3% year-to-date, driven by small-cap companies in niches like specialty chemicals and renewable energy, which are less affected by global economic challenges.
Preparing for the Next Phase of the Rate Cycle
Investors are looking toward potential rate cuts in late 2025, preparing portfolios to benefit from this shift. Expanding exposure to high-beta sectors like technology and cyclical stocks, along with long-duration bonds, is key.
Alternative investments, including infrastructure funds and private equity, will remain central to diversified strategies. Private market players are well-positioned to capitalize on undervalued assets, with record-high dry powder levels.
Conclusion
Investment paradigms are evolving due to the period of interest rate peaks and plateaus. While equities face sector rotations and value adjustments, fixed-income markets are seeing a surge in interest. A balanced, disciplined approach will help investors navigate challenges and seize new opportunities in 2024.
The post Interest Rate Peaks and Plateaus: Implications for Fixed-Income and Equities first appeared on Oman Investment Fund.
]]>The post Beyond BRICS: The Rise of Secondary Emerging Markets in Africa and Southeast Asia first appeared on Oman Investment Fund.
]]>Beyond BRICS: The Rise of Secondary Emerging Markets in Africa and Southeast Asia
As the global investment environment changes, growing interest is being paid to secondary emerging economies in Southeast Asia and Africa. New competitors are now fighting for market share, even though BRICS countries Brazil, Russia, India, China, and South Africa have long been the preferred options for investments in emerging markets.
With the help of deliberate policy reforms, economic diversification, and advantageous demographics, nations like Vietnam, Indonesia, Kenya, and Nigeria are emerging as major actors.
- The main themes influencing these secondary markets are examined in this research, along with the potential, dangers, and insights from sources such as the Financial Times, S&P Global, and McKinsey & Company.
The Allure of Secondary Emerging Markets
- Untapped Potential:Secondary emerging markets provide an entry point to economies that are just beginning to develop, which are often characterized by low levels of foreign investment. This will reduce competition and allow for higher returns for those who enter early.
- Positive demographics:Most of these markets feature young and expanding populations, a significant demographic edge. This goes hand in hand with a growing workforce and an increasing consumer market, leading to economic development and investment possibilities in consumer goods, technology, and healthcare industries.
- Technological Leapfrogging:With regard to the maturing of technology, these markets could be positioned to bypass long phases of traditional development and spring straight into the digital economy. This is the case in the rapid move to embrace mobile technology, digital payments, and e-commerce, which generates a fertile environment for tech-led businesses and innovative solutions.
- Diversification Benefits:Secondary emerging markets are generally less correlated with developed markets, thus providing excellent diversification benefits for international investors seeking to reduce portfolio risk and improve overall returns.
New Drivers of Economic Growth
The Rise of Regional Venture Capital and Private Equity
An increasing number of venture capital (VC) and private equity (PE) investors are looking toward secondary emerging markets, with an awareness of the latent growth opportunities in Africa and Southeast Asia. As a report by the International Finance Corporation (IFC) noted, VC investments in Africa hit a record over $6.5 billion in 2023, led by Nigeria, Kenya, and Egypt. Over $20 billion was posted by Southeast Asia in private equity transactions, thanks to the latter’s vibrant digital economy and entrepreneurial ecosystem (IFC, 2024).
These investments not only propel technology startups but are increasingly venturing into core sectors such as financial services, healthcare, and agribusiness. These markets are most likely to be at the center of global asset-allocation plans in the coming decade, as institutional investors are keenly interested.
The Evolution of Financial Markets and Capital Accessibility
Most of the emerging markets at the secondary level are developing strong infrastructures of advanced finance in an effort to attract foreign capital. Vietnam and Nigeria have already unsealed their stock exchanges for better liquidity and international investor access. The HNX and HOSE reported a total 15% increase in market capitalization during 2023 (Vietnam Investment Review, 2024).
Besides, the Nairobi Securities Exchange (NSE) in Kenya has developed other new financial instruments, such as green bonds and digital assets. The reforms are leading to a stronger, more transparent capital market that institutional investors prefer as an alternative source of investment other than the conventional BRICS economies.
Digital Transformation and Financial Inclusion
Mobile Banking and Fintech Expansion
Financial inclusion has increased at a fast pace because mobile banking and fintech solutions are gaining popularity across Africa and Southeast Asia. M-Pesa’s success in Kenya and Gojek’s payment business in Indonesia have proved that fintech options work in countries where traditional bank penetration is low.
The Global Fintech Adoption Index by EY (2024) reports that fintech penetration in Africa reached 64%, with digital wallets and peer-to-peer lending seeing the fastest growth. Similarly, Southeast Asia’s digital banking sector has witnessed an explosion in demand, particularly in Vietnam and the Philippines, where neobanks are filling gaps left by legacy banking institutions.
The Role of Cryptocurrencies and Blockchain
Blockchain technology is increasingly driving economic activity in secondary emerging economies. The nations that include Nigeria and Thailand have established regulation policies to permit the exchange of cryptocurrencies as well as blockchain-based remittances. Nigeria introduced 2024 a pilot edition of its eNaira, the initial CBDC to be rolled out in the African continent, and has been favored by companies for cross-border payments (Financial Times, 2024).
Blockchain supply chain solutions will assist large industries such as agriculture and logistics from this aspect, minimizing corruption and inefficiency. Decentralized technology will raise the level of trust and efficiency, and the country will also seem more attractive for foreign direct investments.
Infrastructure Development and Foreign Direct Investment (FDI)
China’s Belt and Road Initiative and Infrastructure Investment
Although having geopolitical issues, China continues constructing infrastructure in the whole of Africa and Southeast Asia. China has financed multibillion-dollar projects such as the Belt and Road Initiative (BRI) for constructing ports, highways, and other energy infrastructure. In 2023, it invested $30 billion in infrastructure development in Africa, with a majority share taken by Kenya and Ethiopia (World Bank, 2024).
Indonesia is among the biggest BRI recipients in Southeast Asia by investments, primarily for rail and renewable energy projects. A recent case in point is the highly touted launch of the Jakarta-Bandung High-Speed Rail at the end of 2023.
Japan and South Korea’s Growing Presence
Whereas China continues to lead the charge, Japan and South Korea are accelerating infrastructure investments in secondary emerging economies. The Japan International Cooperation Agency (JICA) committed $10 billion towards Southeast Asian transport and logistics infrastructure development and urban planning in support of smart city growth (JICA, 2024).
In the same vein, South Korea has also expanded its FDI in Africa, especially in the automotive and renewable energy industries. Hyundai and LG Energy Solutions recently announced that they would establish electric vehicle (EV) battery factories in South Africa, making the continent a future global EV supply chain player.
Demographic Advantages and Labor Market Growth
One of the most significant reasons secondary emerging markets have caught the interest of investors is their growing and young, rapidly expanding populations. For instance, Sub-Saharan Africa’s labor force is poised to triple in 2050 to over 1 billion persons (S&P Global, 2024). Such a population dividend can increase consumer purchasing power as well as productivity, making it more attractive for investors.
Indonesia and Vietnam are currently at the forefront of Southeast Asia in terms of middle-class population growth. By 2030, the middle class in Indonesia will make up over 60% of Indonesia’s overall population, contributing to domestic consumption as well as growth in GDP, according to predictions by the World Bank.
Economic Diversification and Reduced Dependency on Commodities
Contrary to most of the BRICS economies, secondary emerging markets have been actively diversifying their economic bases. In Kenya, it has been rapidly expanding its information technology sector to earn the title “Silicon Savannah.” Venture capital funding has been pouring in for tech startups in Nairobi in 2023, with $1.2 billion in that year alone. (Financial Times in 2024).
Other Asian countries have branded themselves as manufacturing bases while exploiting the support of shifting supply chains away from China. FDI into Vietnam’s manufacturing sector grew by 15% in 2023 as trade agreements continue to grow coupled with increased favorable investor policies (McKinsey & Company, 2024).
Trade Agreements and Regional Integration
Indeed, ASEAN economies derive benefits from deep regional integration. Trade liberalization is much more fluid and streamlined due to cross-border investments because of deals like RCEP. S&P Global states that intra-ASEAN trade jumped by 8% in 2023 as a measure of strength in regional economic ties.
African countries are also integrating regionally with the African Continental Free Trade Area (AfCFTA). The trade pact between 54 African countries is to raise intra-African trade by 52% by 2025. This makes them more susceptible to external markets and less resilient economies (Financial Times, 2024).
Key Investment Opportunities
Technology and Digital Infrastructure
There is an explosion in digital adoption in Africa and Southeast Asia. Africa stands out with mobile penetration reaching 75% by 2025, thereby facilitating increased adoption of more mobile banking, fintech, and e-commerce sites. For example, the Nigerian fintech sector alone attracted $2 billion in investments in 2023, placing it at an all-time high to be considered among the continent’s leading centers for digital financial services (McKinsey & Company, 2024).
Indonesia’s e-commerce market in Southeast Asia is booming. Its online retail sales will be compounded annually by 12% up to 2028. Players GoTo and Sea Limited lead the digital economy space and continue to attract very strong institutional investment. (S&P Global, 2024).
Renewable Energy and Sustainability Initiatives
Africa and Southeast Asia renewable energy projects are gaining the attention of global investors looking for ESG-complaint opportunities. Kenya tops the list in Africa, where 80% of its electricity is generated from renewable sources, including geothermal and wind power. The country has attracted more than $1.5 billion in renewable energy investments over the last two years (Financial Times, 2024).
Similar to others, Vietnam is on the top ten list for global production of solar and wind energy as well as solar electricity. The country aims to increase its renewable source of power by 2030 by 30% compared to the existing capacity. Infrastructure investments may be massive in such programs under these initiatives (McKinsey & Company, 2024).
Agriculture and Food Security
Another promising area is the agribusiness sector, where food security would be the major priority for Africa. Africa has 60% of the world’s uncultivated arable land, which creates enormous opportunities for agricultural investments. Precision farming, agritech solutions, and sustainable agriculture practices are becoming popular since FDI in this sector is increasing (S&P Global, 2024).
Risks and Challenges
Political and Regulatory Uncertainty
While secondary emerging markets are enormous opportunities, challenges abound. Major concerns include political instability and the unpredictability of regulations. Nigeria’s currency devaluation in 2023 led to capital flight in short-term capital as volatility in the equity markets surfaced (Financial Times, 2024).
Similar to this, Indonesia’s policy changes regarding foreign ownership in key industries. It has caused concern among institutional investors. Investors need to do their due diligence and increase exposure across multiple markets to mitigate such risks.
Infrastructure Gaps and Supply Chain Limitations
Even with economic development, most secondary emerging markets continue to experience high infrastructure shortages. Inadequate road networks, unreliable electricity supply, and logistical inefficiencies can deter investment growth. For instance, even with its thriving manufacturing industry, Vietnam continues to experience port congestion and high shipping rates, affecting supply chain reliability (McKinsey & Company, 2024).
Foreign Exchange and Inflation Volatility
Currency fluctuations create another risk exposure for investors. In Africa, inflation rates still run high at double-digit values in Ghana and Nigeria in 2023. Depreciation of local currency against the USD can eat up returns for overseas investors. Indonesian Southeast Asian Economies have similar rupiah fluctuations due to global interest rates (S&P Global, 2024).
Conclusion
The emergence makes a strong argument for diversification outside of BRICS of secondary emerging markets in Southeast Asia and Africa. These areas profit from youthful populations and economic diversification, and they present substantial investment potential in agribusiness, renewable energy, and technology. However, investors must have to manage inherent risks like currency fluctuation, infrastructure deficiencies, and political instability.
Institutional investors can take advantage of the new trends with the help of regional trade agreements, sustainable project participation, and diversified portfolios. Secondary developing markets have the potential to emerge as the next significant area for growth and development as global capital flows adapt to the changing economic order.
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]]>The post Supply Drops Expected to Rattle Commodities first appeared on Oman Investment Fund.
]]>Alongside tragic human consequences, the war between Russia and Ukraine has had manageable economic implications for the majority of the globe thus far. Even though the US economy is already feeling some of those effects, there should be enough offsets to keep the pain at bay. It is important to note, however, that regional ramifications will vary depending on the circumstances. While heightened energy prices and links to the Russian economy can make other places vulnerable, the supply shock could prove beneficial in oil-producing areas. Despite these differential impacts, their expected trajectory is not significantly altered. However, when tensions escalate, and sanctions increase, that could change.
Severe disruption to the global energy market was and will remain the most fundamental impact associated with recent events. As Russian oil and gas supplies have diminished and the Nord Stream 2 pipeline has been closed, prices have already risen noticeably. In the near future, gasoline is likely to become even more expensive unless the conflict is resolved unexpectedly. There is no doubt that this is a headwind to European growth, but the situation is more complex in the US Energy production is expected to increase in a handful of regions as prices rise, driving rig counts upward.
However, with that being said, the current situation unfolding in global supply chains is unique in that it has had a global impact. Over the years, there have been many challenging periods. Production, operations, and consumption are all affected by the ripple effects.
Supply Chain Risks & Global Agriculture
The Eastern European region supplies the world with a variety of commodities. More than one-third of global cereal consumption comes from Russia and Ukraine, representing 14%, 19%, and 4% of the wheat, barley, and corn consumed globally. Approximately 50 countries use their output to feed themselves, many of which are least developed nations, according to the UN’s Food and Agriculture Organization (FAO). The Russian agricultural industry is one of the largest producers of fertilizers in the world, including nitrogen, phosphorus, and potassium. The growing conflict in the region raises concerns that there will be shortages and yield issues, not only in Ukraine and Russia but around the world, as farmers everywhere will be affected by the Eastern European supply shortage. Furthermore, rising energy prices affect the cost of transportation of commodities.
Among Ukraine’s major exports are cereals and edible oils, and much of its wheat is grown in the southern and eastern regions where Russian military operations are intensifying. Meanwhile, Russia and Belarus (both subject to significant sanctions) are key exporters of agricultural inputs, including fertilizer. Concerns are growing about the effects the conflict will have on the global food supply – UN chief Antonio Guterres pointed out on 18 May that the number of severely food insecure people worldwide had doubled in the past two years and warned of years of famine if there is no resolution to the global food crisis.
Food-related unrest is likely to increase over the next few months in parts of the Middle East, North Africa, and Sub-Saharan Africa as staple food prices rise. A spike in food prices in 2007-08 and 2010-11 sparked food riots across several regions, precipitating political instability and conflict in the Middle East and North Africa. Several Asian countries, including those with recent histories of social unrest, rely heavily on grain from Russia and Ukraine.
As a result of rising global food prices, governments may restrict exports of food and fertilizers to ensure domestic food supply and control prices. Despite surging inflation, India – the world’s second-largest producer of wheat – banned exports of the cereal, causing global wheat prices to jump by an additional 6%. Since the conflict began, about two dozen other countries have imposed restrictions on food exports. Other countries could suffer further hardships if additional restrictions are imposed.
Global businesses are affected significantly by this. Due to the scarcity of resources, Ukraine and Russia will not only be unable to produce their usual output but also see higher prices for those products. In the last month alone, wheat prices have risen by 50% due to the conflict. Consequently, if poorer countries are forced to purchase essential foods at higher prices, it may trigger further economic protectionism, resulting in a decrease in global purchasing power.
Chip Shortages Resulting From Supply Chain Disruptions
In addition to the above, the semiconductor and chip industries pose a serious concern. There was a chip shortage in the world before the conflict in Eastern Europe began. Consumers were unable to obtain chips during the pandemic due to a misalignment between supply and demand. As a result of the ongoing crisis, the situation has worsened. Neon is a major commodity produced in Ukraine, while nickel, platinum, silver, and palladium are key commodities produced by Russia. The semiconductor industry relies on all of these ingredients. The semiconductor industry is predicted to grow by 50% over the next four years, according to industry experts. A shortage in supplies will lead to rising prices for semiconductors and semiconductor materials if the situation continues to develop in the same way.
Using responses from the S&P Global Manufacturing PMI survey, the S&P Global PMITM Commodity Price and Supply Indicators track the development of price pressures and supply shortages for at least 20 commodities each month. Semiconductors experienced the most severe upward price pressure in April. However, there are hints that supply shortages and price increases for semiconductors are peaking, though the situation is still severe by historical standards.
The Impact on Fuel and Fuel-Related Commodities
Globally, Russia exported the most natural gas in 2021, the second most crude oil after Saudi Arabia (and third overall behind the US and Saudi Arabia), and the third most thermal coal after Indonesia and Australia. There has been a voluntary boycott of Russian oil announced by some buyers since the start of the Ukraine conflict, while Western powers have imposed restrictions and sanctions on Russian energy imports. Oil imports from Russia have been banned by the US and Canada, and the UK has pledged to wind down imports in 2022. With the aim of reducing gas imports by two-thirds by the end of 2022, the EU has banned Russian coal imports. There are also plans to ban Russian oil in the EU, though the decision has been delayed due to opposition from some members of the bloc. Increasing global competition for oil, coal and liquified natural gas (LNG) is driving up prices and causing shortages in other regions as Western countries seek alternatives to Russian fossil fuels.
Globally, rising energy prices have long been a major cause of civil unrest, and in 2021, energy-related protests rose. Civil unrest in dozens of countries around the world has increased since the conflict in Ukraine began on 24 February. Power supply disruptions (including power cuts) and rising fuel costs will likely continue to spark protests (especially in lower-income countries where energy makes up a large proportion of consumption).
Due to limited coal supplies at most of the country’s power plants and a heatwave that has increased electricity demand for cooling, protests have erupted in some areas of India since April. Fuel prices increased in Peru in March, prompting demonstrations by transport drivers. Several departments became violent as these spread across the country. Likewise, rising fuel costs in Paraguay have sparked protests since March. High fuel prices have prompted truck drivers in Brazil to strike.
In addition, the perception that governments are taking action to remove protections from rising fuel costs has long been a catalyst for protests. Liquified petroleum gas (LPG) prices were increased by the state in January 2022, leading to unprecedented large-scale protests in Kazakhstan that were quickly hijacked by political leaders. Globally, citizens will be watching the response of their governments as gas prices rise. More unrest is likely in the coming weeks and months as a result of policy announcements such as the removal of fuel and power subsidies.
The Situation in Europe
The rising cost of energy will affect countries across the Middle East, Africa and Latin America, even though some commodity exporters may benefit. Europe, however, is particularly vulnerable to disruptions of its energy supply from Russia. About half of the countries in the EU (mostly in Central and Eastern Europe) import more than 50% of their gas from Russia, which is highly dependent on Moscow for hydrocarbon imports. In the event that the EU adopts more draconic energy sector sanctions (banning oil imports), and Moscow retaliates by cutting off gas supplies, protests will become more likely. Gas transiting through Ukraine is likely to be disrupted further, as it has already cut off the gas supply to Poland and Bulgaria.
It is also possible for civil unrest to erupt in Hungary due to energy security concerns and price spikes related to those concerns. A price cap on fuel and electricity that was set to expire on 15 May has been extended to 16 November. As of late April, Hungarian fuel price comparison provider Holtankoljak estimated that free market prices would likely be around HUF 591 (EUR 1.54) for a liter of petrol. Riots are likely to occur as a result of this policy in two ways. In the first case, lifting the price caps would negatively impact living expenses, resulting in public dissatisfaction. Furthermore, price caps on food have already caused supply shortages, which will likely extend to fuel as well. Due to insufficient margins and government support, a significant share of petrol stations will be unable to operate throughout June, according to an association that represents petrol (gas) stations.
Global Impact: Supply Continues to Drop
As central banks ramped up their fight against inflation last month, supply issues return to the fore in September. The OPEC+ meeting at the beginning of the week determines the near-term fate of oil prices, while the global gas industry gathers in Milan to consider the pressures caused by Russia’s invasion of Ukraine and soaring fuel prices. Agricultural and power markets are on high alert for extreme weather, including hurricane season and soaring temperatures in California. Among the top grain exporters, Australia will update its crop forecast soon.
Supply Disruptions in China Amidst Other Factors
Trade figures on Wednesday will provide a checkup on the health of China’s commodities imports, which are recovering from their own historic drought. There are several factors complicating the release of the data, including the power shortages, the property market crisis, and the Covid Zero rulebook thrown at Chengdu. The data on China’s imports for August should provide insight into the direction of metals prices. Despite the government’s commitment to spend more on infrastructure, there are questions about whether it will be enough to offset the impact of virus-related curbs on economic activity and a teetering real estate market. The first week of September’s purchasing managers’ indexes shows that there were some grounds for optimism that the economy has at least bottomed out. While steel production continued to decline in August, the pace of decline slowed sharply and, locking down notwithstanding, China is now entering one of its peak construction seasons. Trade data will be analyzed to determine if overseas demand for items like iron ore and copper has increased.
Eastern-Europe Tensions Directly Impact Global Conditions
Supply chains will be impacted further as the conflict in Eastern Europe continues to unfold. Food prices may rise by 20% as a result of the current conflict in Eastern Europe, according to FAO. The FAO food price index reached a new high in February, and experts worry it will continue to rise. If food insecurity continues to rise, further inflation may be triggered, and consumer habits may change, as consumers may become less willing to spend their money. Some of these changes are being felt today by the US and Europe. Alternatively, key countries may release more crop supplies, lowering food insecurity and inflation.
As for semiconductors and chips, some companies, such as Tesla, are rethinking how they produce them based on consumer demand and supply. Furthermore, Covid continues to disrupt global supply chains in a substantial way. COVID-19 outbreaks and renewed lockdowns result in pockets of improvement, only to be followed by setbacks when key sites experience outbreaks and setbacks, such as in China recently.
Currently, it is not possible to predict what the conflict in Eastern Europe and supply chain bottlenecks and sanctions will do to economies, prices, and supplies. While global disruptions remain ever-present, it’s more crucial than ever to keep track of the supply chain and gain end-to-end visibility. The business continuity plans of many companies include assessing the immediate risk from suppliers in Ukraine, Russia, and neighboring countries, as well as the second-order effect of suppliers. Aside from these decisions, many new import/export restrictions and government policies are being implemented to move supplies in and out of the affected area.
Global logistics disruptions and volatility have exacerbated component shortages across all modes of transportation (air, ocean, rail, and courier). The virus outbreak, climate change and geopolitical situations have caused a domino effect tha
t has resulted in a significant increase in prices. Currently, demand is outstripping supply, and manufacturers cannot support orders with short lead times. The average order backlog is three to four months, while the average backlog for automotive grade Multilayer Ceramic Capacitors (MLCCs) is five to six months.
As evidenced by the latest price and supply indicators from S&P Global, cost pressures and supplier shortages at manufacturers worldwide continued to ease in August. Prices increased at their lowest level in two years, as cost pressures moderated across the vast majority of commodities monitored by the survey. All metals commodities also declined for the first time since May 2020. The Ukraine war continued to impact energy markets, bucking the wider trend and increasing costs on the month.
Outlook for the Near Future
According to a report by Supplyframe, a global electronics value chain intelligence platform, semiconductor shortages are expected to continue until the first quarter of 2023, affecting the production of technology-dependent products such as automobiles. For many component categories, manufacturers can expect severe supply constraints and cost inflation pressure in 2023. What happens if a product is scarce yet indispensable? The price of goods skyrockets, lead times increase, and provision costs increase. Manufacturer margins may suffer as a result.
Despite continued strong demand, the global supply chain remains tight, and manufacturers have difficulty managing the mix and continuing bottlenecks in specific product families. Despite most suppliers’ factories running at almost full capacity, there are still some manufacturers further constrained by the spread of COVID-19.
Various industries, including automotive, 5G and wireless, and IoT, are expected to continue to drive the growth of semiconductor consumption, with the automotive market, which remains the most talked about business vertical, continuing to grow. For most suppliers, this market will be critical to achieving substantial revenue growth in the future. In the supply chain industry, uncertainty is expected to persist until at least 2022 – and in the case of the global chip shortage, until 2023 – as backlogs are cleared, and demand is met.
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]]>The post Insight into Global Sovereign Wealth Fund Performance – 2022 Insights first appeared on Oman Investment Fund.
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Sovereign investments are inextricably linked to the economy and finances of their host countries, and there are usually more issues at stake than merely pursuing higher returns. Due to their global and diverse nature, Sovereign Wealth Funds (SWF) are unavoidably impacted by everything that occurs in the world, from geopolitics and pandemics to climate change and technological upheaval. The business environment is always changing, and a single year can see major changes.
Global Sovereign Wealth Fund Performance – A Holistic Overview
Despite increased vaccination rollouts and 4.5 billion people around the globe getting vaccinated, the world has still not gotten “back to normal”. Even though a 5.9% growth was observed in the global GDP, concerns regarding poverty, inequality, and geopolitical tensions were not alleviated. To add to the mix, rising energy prices, global supply chain disruptions, and an astonishing surge in inflation rates that the West has not witnessed in the past three decades dominated the year 2021. Due to these reasons, Sovereign Wealth Funds and Public Pension Funds have continued to operate cautiously. While some funds were asked for capital or for domestic bailouts, others availed of opportunities overseas and greatly benefited from the stock rally.
According to a Global SWF report for the past year, 2021 was yet another successful year for state-owned investors. Since March 16, 2020, the stock markets around the world, and particularly the US stock markets, have continued to rise. In the 21 months to the end of 2021, the S&P500 has more than doubled, the Dow Jones Industrial Average grew 90%, and the S&P 1,200 Global Index was up 86%. For better or for worse, sovereign wealth funds and public pension funds continue to hold a very significant exposure to American stocks – which has allowed most to score their best-ever results and boost their AuM.
In 2021, the size of the SWF industry increased a 6% year on year and exceeded the US $10 trillion mark for the first time in history. This was helped not only by the price of equities, but also by the recovery of oil prices, and to a lesser degree by new funds established during the year. Public pension funds also accomplished a historical milestone after growing past US $20 trillion and experienced a higher y-o-y growth of 8.7% due to increased exposure to US stocks, and to rising contributions from pensioners around the world.
The performances of the different asset classes varied significantly during 2021. Fixed Income was the only asset class with negative returns, as measured by the S&P 500 Bond global index. While according to S&P Global 1,200 index, public equities continued to display a strong performance. Hedge funds disappointed again with returns significantly below stocks. Private markets are always more challenging to follow as SOIs do not necessarily carry out valuations every quarter, and if they do, they have a certain lag. However, according to indices of listed companies, real estate was the best performing asset class of 2021, followed closely by PE.
State-owned investors invested more money in 2021 than in any of the six years before it – both in terms of the number of deals and in terms of deal value, which was over US$ 219 billion. Compared to 2020, SWFs deployed 19% more, with US$ 106.1 billion in 500 transactions; while investments by PPFs increased significantly in terms of both value and volume, up to US$ 112.9 billion in 354 deals.
Much to the benefit of the Developed Asia-Pacific, emerging markets were only able to attract 22% of the capital this year, which is one of the lowest figures in six years. Another key trend during the period 2016-2021 was the change in SOIs’ sectorial preferences. In 2016, over half of the deals were in real assets, however, today that figure has decreased to a third of the total. Unsurprisingly, the industries of healthcare, retail and consumer, and technology have all gained importance. This increase has been attributed to Venture Capital for all three sectors.
But not all developments have been about the private markets. Sovereign funds are now very active in stock markets around the world, and some have started diversifying away from the US markets.
On the other hand, the Singaporean SWF deployed US$ 34.5 billion in 110 deals, almost double of what it did in 2020. Almost half of that capital was invested in real estate, with a clear bias toward logistics. GIC was again way ahead of everyone else. The next biggest spender was CPP with US$ 23.7 billion, of which 61% was invested in real assets. Both funds present a strong preference for North American assets and a smaller than average appetite for Emerging Markets. Other Top 10 funds including ADIA and Mubadala think differently.
Meanwhile, China and India are providing an alternative to diversify public holdings. Most SOIs proved to be bullish on Chinese stocks, especially ADIA, which has shut down its Japanese program to focus on China, and PIF, which recently applied for QFII status. Indian stocks on the other hand were dominated by GIC, with US$ 14.8 billion in holdings. This is in stark contrast with CDPQ, which sold most of its Indian positions.
Apart from growth in assets and deal activity, one of the major trends we are seeing is a shift in investment strategy, and whether it makes sense for SOIs to adhere to the conventional view of strategic asset allocation or to adopt a more streamlined and dynamic approach to portfolio construction. It has been observed that funds that use Total Portfolio Management typically have greater financial returns, indicating that additional funds might adopt this strategy.
2022 – Recent Developments
Opportunities in Short-Term Bonds
It seems for the year 2022, quite a bit of focus has been on the national elections across several countries throughout the world. This is being closely monitored by sovereign investors, including for regions such as Asia-Pacific (South Korea, Philippines, Australia) in Q1-Q2; in Africa (Kenya, Angola) in Q3; and in Latin America (Brazil) in Q4. In addition, there is a keen interest and observation of the new dynamics of Europe while for the US the mid-terms and potential candidacy of Trump 2024 are being closely watched.
Norway
In light of some recent developments, it has been reported that Norway’s sovereign wealth fund, the largest in the world, has lost $174 billion in the first half, citing inflation and the war in Europe. According to details reported by CNBC, Norway’s sovereign wealth fund had a loss of 1.68 trillion Norwegian kroner ($174 billion) in the first half of 2022, as stock markets saw a tumultuous six months.
The $1.3 trillion fund returned a negative 14.4% during the period, as stocks and bonds reacted violently to global recession fears and skyrocketing inflation. However, the fund’s return was 1.14 percentage points better than the return of the benchmark index, Norges Bank, the country’s central bank, equivalent to 156 billion kroner.
The CEO of Norges Bank Investment Management, Nicolai Tangen, stated that “The market has been characterized by rising interest rates, high inflation, and war in Europe. Equity investments are down by as much as 17 percent. Technology stocks have done particularly poorly with a return of -28 percent.”
Fixed income investments and unlisted renewable energy infrastructure had declines of 9.3% and 13.3%, respectively, while the fund’s return on equity investments fell 17%. The fund’s fortune is based on Norway’s enormous North Sea oil and gas deposits. After the fund made significant investments in wind power in recent years, the energy sector was the only one that did not see negative returns.
“In the first half of the year, the energy sector returned 13 percent. We have seen sharp price increases for oil, gas, and refined products,” Tangen added.
NBIM’s (Norges Bank Investment Management) performance is “symptomatic” of a larger trend across most major investment funds, Economist Intelligence Unit analyst Matthew Oxenford told CNBC.
“The first half of 2022 saw a significant upheaval in financial markets globally, and most diversified funds have seen declines in their value,” Oxenford said.
“Globally, much of this decline was driven by aggressive monetary tightening by central banks, which led to a sharp decline in investment in fast-growing firms in high-growth sectors such as tech (with Meta being the largest single source of loss in NBIM’s portfolio) as the return on safer investments increased and the global pool of high-risk investment shrinks,” he said.
“Given that NBIM is highly diversified, and pursuing a longer-term investment strategy, it is likely to weather this storm, although the exceptionally high growth rates we’ve seen in 2020 and 2021 are unlikely to return as global central bank interest rates aren’t likely to return to the pandemic-era near-zero levels any time soon,” he said.
Inflation, interest rate hikes, and war in Europe have majorly affected the U.S. indexes, with the Dow Jones Industrial Average losing more than 15% in the first six months of the year, the S&P 500 down over 20%, and the Nasdaq Composite falling almost 30%.
Saudi Arabia
Meanwhile, for the Middle East region, a report by Business Insider has stated that Saudi Arabia’s sovereign wealth fund has added a $412 million bet on tourism, with oil income boosting equity investments.
According to the report, the Kingdom’s Public Investment Fund has announced a $412 million, or 1.55 billion riyals, investment in Almosafer Travel & Tourism, which amounts to a 30% stake in the company.
The PIF, which is chaired by Crown Prince Mohammed bin Salman, has delved deeper into equity investments as revenues from oil have aided in the Kingdom’s drive toward a goal of overseeing $1 trillion in assets by 2025, up from $620 billion now. The PIF had previously poured $7 billion into stocks including Amazon and BlackRock in August after oil income soared in the second quarter amid plans to buy a total of $10 billion in stock this year. In May, the fund acquired a $1.5 billion stake in Prince Alwaleed Bin Talal’s investment company. The kingdom has been one of the primary beneficiaries of elevated energy market prices since Russia invaded Ukraine in February, though crude oil has come off its high in recent months. Last month, state-run giant Saudi Aramco reported that second-quarter net income soared 90% to $48.4 billion.
Qatar and Pakistan
On the other hand, it has been reported by various media outlets that Qatar’s sovereign wealth fund is aiming to invest $3 billion in Pakistan. It has been reported that Qatar’s Investment Authority seeks to invest $3 billion in various commercial and investment sectors in Pakistan to boost the country’s cash-strapped economy.
The announcement was made during a visit to Doha by Pakistan Prime Minister Shehbaz Sharif, who held official talks with Qatari Emir Sheikh Tamim bin Hamad al-Thani, after a meeting with the QIA.
Pakistan is in deep economic upheaval and faces a balance of payments crisis, with foreign reserves having dropped as low as $7.8 billion, which is barely enough for more than a month of imports. It is also battling with a widening current account deficit, depreciation of the rupee against the US dollar, and inflation that hit more than 24% in July.
Egypt
Focusing on the African part of the Middle Eastern region, it is being reported that Egypt’s Sovereign Wealth Fund is working on a pre-IPO work plan and that the fund has already completed a list of some assets that will be included in the fund to be presented to strategic investors.
Minister of Planning and Economic Development Hala El-Said added that the subsidiary fund was established to prepare shares that will be offered in the IPOs committee and that the first shares that will be managed are the shares of an investment bank in a number of affiliated companies for the public sector.
Sources closely related to the file told Daily News Egypt (DNE) that the Sovereign Fund of Egypt is working on developing a work plan for the IPO Fund and a list of the companies to be offered is currently being drawn up, as well as the shares in question, and the timetable for seizing the favorable opportunities in the market to complete the offerings with the best evaluation. The sources confirmed that the fund has already completed a list of some assets that will be included in the fund to be presented to strategic investors.
The IPO program aims to develop foreign direct investments in the stock market and accelerate the implementation of the government’s plan to exit certain sectors as per the State Ownership Policy Document.
CEO of Egypt’s Sovereign Fund Ayman Soliman said in previous statements that the pre-IPO fund will provide investment opportunities worth hundreds of millions of dollars for these major funds, which will reflect on Egypt’s benefit from entering foreign investments quickly, coinciding with the presence of shareholders who maximize the value of the fund.
Soliman added that the fund aims mainly to accelerate some investments to enter into targeted partnerships through the IPO program to expand the ownership base, and the fund will allow these investments to enter even in the absence of favorable market conditions for the completion of public offerings.
In addition to this, he affirmed that the Sovereign Fund of Egypt carefully selects strategic investors by setting several conditions to be invited to subscribe to the pre-proposal fund, the first of which is for the strategic investor to create an added value for the company’s under-investment, maximize its value, and enhance the value of completing the public offering.
Furthermore, Ahmed Hesham — Head of the Strategic Research Sector at Beltone Securities Brokerage — said that the capital market needs more reform measures to become more attractive to investments and to be ready to receive proposals in general.
He also explained that it is necessary to work to increase the competitiveness of the Egyptian market, especially in light of the strong competition from the surrounding Gulf markets to attract foreign capital.
He added that Egypt has reached an agreement on a positive IMF loan for the money market, but the market needs more extensive measures.
Key Dynamics for Q4 2022
Investors will also keep an eye on Chinese dynamics, particularly those related to President Xi’s predicted continuation of his campaign against Chinese tech companies. In contrast to geostrategic investment, games and shopping may lose pace, which might have an impact on the entire Chinese venture capital market. Temasek and other investors appear to be “too deep” in China to seek an escape, while other investors may keep looking for alternatives in Southeast Asia, India, or other undiscovered areas outside of the continent.
International attention is expected to be focused on the Middle East and North Africa. The upcoming UN session on climate change (COP27) will take place in Sharm el-Sheikh in November, and the WBG-IMF biennial meeting overseas will finally take place there in Marrakesh in October. PIF will be finishing up phase 1 of the development of the Red Sea Project, one of its multi-billion, giga-projects, just 500 kilometers to the south over the border between Umluj and Al Wajh.
Lastly, the world is looking forward to seeing new SWFs being formed in Israel, Namibia, Ethiopia, Mozambique, and even Germany; and to merged pension schemes arising in the Middle East and Australia. It is also being stated that the depleted Latin American stabilization funds may finally start receiving capital again as oil revenues accumulate.
The post Insight into Global Sovereign Wealth Fund Performance – 2022 Insights first appeared on Oman Investment Fund.
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