I made my first trip to Dubai in more than 20 years last week and was struck by the intensity of interest in growing financial connectivity between the Middle East and Asia.  

This topic is trending like a Taylor Swift tour, in financial circles at least. There is a constant flow of government-level and business delegations from Asia to the Middle East – and vice versa. The future of this relationship is a mainstay of investment conference agendas and the subject of volumes of expert commentary.  

Closer engagement between China and Saudi Arabia is particularly prominent and beginning to bear fruit. This week, Hong Kong Exchanges and Clearing announced that it had added the Tadawul as a Recognised Stock Exchange, allowing Saudi-listed firms to apply for secondary listings in Hong Kong. In August, the two countries signed $1.33 billion of cooperation agreements on the sidelines of the Saudi-Chinese Business Forum in Riyadh. In December, Saudi Arabia’s Future Investment Initiative Institute will hold its first summit in Asia – in Hong Kong.  

Historically, the balance of payments has flowed from Asia to the Middle East, driven by oil and gas shipments. Hydrocarbons have already bonded the two regions closely together: Asian demand has been growing and energy security is critical for nations in the region; consistency of demand is likewise vital for producers in the Middle East.

There is, however, a critical, unanswered question about how investment flows will evolve from here. 

Both Asia and the Middle East have an abundance of public and private wealth that is often invested overseas. But key economies in both regions also seek to attract external investment. This includes China and Saudi Arabia, which are both net exporters of capital with positive international investment positions. Saudi Arabia will borrow in the international bond markets to finance a budget deficit. China, which has faced outflows of portfolio investment this year, has been actively engaging public and private market investors. 

In the balance 

So as Asia and the Middle East court each other, which region will be the net investor in relation to the other? 

You might argue that it doesn’t matter too much. Whatever the balance in the bilateral investment position, growing two-way volumes will bring the two regions closer together over time and start to change global asset allocation patterns – with implications for valuations everywhere. This is a fair argument. Two very simple examples point to the potential impact of greater investment flows between Asia and the Middle East. 

The Abu Dhabi Investment Authority (ADIA) is the world’s fourth biggest sovereign wealth fund, with $993 billion of assets, according to Global SWF. It invests 5-10% of its portfolio in developed Asia and 10-20% in emerging markets (mainland China, Taiwan, India and South Korea alone account for 71.9% of the MSCI Emerging Markets Index, although ADIA’s investments extend well beyond listed equities). Hypothetically, increasing those maximum allocations by just 5% could result in nearly $50 billion of additional capital going to each geographical grouping. 

At the other end of the corridor, China Investment Corporation (CIC) allocated 25.39% of its Global Investment Portfolio to non-US developed market public equities and 13.13% to emerging markets and others, according to its 2021 Annual Report, released in November last year. As the world’s second-largest SWF with some $1.35 trillion of total assets, even a small reallocation to Middle Eastern markets and asset classes would move the needle.  

Rising tide 

A rising tide could lift all boats, then. But the prevailing direction for capital flows of all different types does matter. Being a net investor results, in principle at least, in exercising net influence in areas like corporate strategy, governance and sustainability, as well as which sectors of an economy get more capital. That has obvious and far-reaching implications. 

It also matters from a communications perspective. If you expect to be a net recipient of capital, then you would naturally focus on the attractions of the economic transformation that others can finance. You are a seller trying to reduce the cost of capital.  

On the other hand, if you expect to be a net investor, you will want to focus on how attractive the other region is in terms of generating returns. You are a buyer trying to increase the cost of capital.  

This kind of positioning will become more important as the investment style of institutions from these two regions evolves. Public sector investors from Middle Eastern countries have traditionally favoured a passive portfolio approach, but leadership across the region is aligning its goal of economic diversification with a more strategic approach to inbound and outbound investment. Indeed, seasoned observers tell us that SWFs supporting national policy priorities will be the catalysts for growing capital flows between the regions.

It’s still early in the game for this fascinating, multifaceted relationship – one that I only expect to grow in importance. This short piece just scratches the surface: Asia-Middle East investment links will likely impact a wide spectrum of critically important topics, from the energy transition to the future of capital markets and asset management.  

But the question of who will fund who is a central one that will shape the narrative about this relationship in the years ahead. If you want to know what to focus on in communications, an old colleague of mine used to say, follow the money.