3/3/2011 12:22:41 PM

SWFs View Mid-East Conflict as Nonthreatening, Opportunity in Commercial RE

Patrick Thomson, head of J.P. Morgan Asset Management's sovereign wealth fund client group, notes that he sees opportunity in real estate and that as a long-term investor, conflict in the Middle East has not spurred huge changes in investment policy.

(March 3, 2011) -- Last week, news spread that civil war was possibly emerging in Libya. With continued political strife in the Middle East, should investors be worried about the impact on their portfolios?

J.P. Morgan Asset Management is exploring the affects of turmoil in the Middle East on equities and oil prices in light of the events in Libya. With the potential of revolutions spreading to Saudi Arabia, the world’s largest oil producer, the firm is questioning whether investors should make portfolio changes as a result.

The spike in oil prices has rightly frightened investors. Yet Patrick Thomson, head of J.P. Morgan Asset Management's sovereign wealth fund client group, told aiCIO that as a long-term investor, conflict in the Middle East has not spurred huge changes in investment policy. The Mid-East turmoil has introduced volatility that has concerned investors, encouraging them to review their liquidity positions to ensure that if the situation continues to deteriorate, they're protected, Thomson told aiCIO. "One of the great lessons learned over the crisis is that investors must retain enough liquidity to maintain short-term liabilities." He added: "We're clearly affected by movements in oil prices, but the crisis impacts only a small part of the investment universe that shouldn't affect the remainder," he said, noting his belief that high oil prices are driven by political events as opposed to fundamental events and will thus be more short-term.

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Thomson's comments mirror perspectives voiced earlier this month from investment consultants, who are indicating to their clients that despite the current crisis in the Middle East, investors must take a longer-term approach, viewing the crisis as a natural evolution while placing greater emphasis on county-risk.

The continuing situation in Egypt has raised a red flag for institutional investors in that they must become more aware of the issue of sovereign debt, according to Cynthia Steer, managing director of investment strategy at Russell Investments. "Conflict within emerging markets in the Middle East is part of a natural evolution," she told aiCIO, noting that the strife puts a spotlight on the need for institutional investors to transition from focusing on asset allocation to focusing on country-risk. "This crisis is reflective of the fact that we, as institutional investors, need to move faster in understanding this." The general position among many investment consultants is that potential client concern would likely be a result of broader worries about the volatility of equity markets worldwide as opposed to worries directly focused on Egypt, with its relatively small, anemic economy. "Egypt doesn't have much direct exposure for our clients given the modest size of its economy and its capital markets – with the lack of Egypt’s economic success possibly being a driver of popular unrest in the first place," said Matt Stroud, a member of Towers Watson Investment’s Global Investment Committee, responsible for the firm’s views on the economy and markets.

When asked about opportunities in 2011, J.P. Morgan's Thomson said that his team is increasingly interested in emerging markets, as well as credit markers and commercial global real estate. "Real estate is still below its pre-crisis levels, and we think there's opportunity there as yields start to normalize," he said.

In contrast to recent research that has shown that pension funds and other institutional investors are backing out of traditional equity  and bond allocations and increasingly favoring alternative asset classes, Thomson indicated that he believes global equities represent significant value, with demand especially driven outside the US.

To contact the aiCIO editor of this story: Paula Vasan at pvasan@assetinternational.com; 646-308-2742