Amid rising geopolitical uncertainties, sovereign investors are adjusting their strategies by shifting more capital towards emerging markets. According to a recent study, geopolitical tensions have now overtaken inflation as the main concern for these investors.
The survey revealed that 83% of respondents identified it as a major risk to global growth in the coming year, up from 72% in 2023. This increase highlights growing anxiety over the competition between major powers and the potential for trade disruptions.
The Invesco Global Sovereign Asset Management Study 2024 reveals a notable trend among sovereign investors, including central banks, sovereign wealth funds, and public pension funds, towards reallocating their portfolios to tap into the potential of emerging markets. Sovereign wealth funds (SWFs) see emerging markets as potential beneficiaries, particularly due to trends like near shoring.
Invesco’s study further revealed that 67% of SWFs anticipate that emerging markets will match or surpass the performance of developed markets over the next three years. This pivot comes as developed markets grapple with sluggish economic growth and heightened political instability.
Emerging markets, characterized by their robust growth trajectories and expanding consumer bases, present a compelling investment case. Countries in Asia, Latin America, and Africa are becoming increasingly attractive as they exhibit resilience and growth potential despite global economic headwinds.
Infrastructure leads the way as the most popular asset class over the next 12 months, with a net asset allocation intention of 21%, followed by listed equities (19%) and absolute return funds/hedge funds (12%). By contrast, SWFs’ sentiment towards cash (-11%), real estate (-6%) and private equity (-3%) has diminished.
However, SWFs are increasingly adopting a more nuanced approach to investing in these markets. They are carefully considering the unique risks and opportunities presented by each country, taking into account the complex and interconnected geopolitical landscape.
The study highlights several factors underpinning this strategic shift. Primary among them is the need for diversification. With traditional safe-haven assets such as U.S. Treasuries offering lower yields, sovereign investors are seeking alternatives that can provide better returns without significantly increasing risk.
Geopolitical tensions, particularly those involving major economies, have also played a crucial role. The ongoing trade disputes, regional conflicts, and sanctions have led investors to reconsider their exposure to certain markets. Emerging markets, with their relative political stability and economic dynamism, are perceived as viable alternatives.
“Respondents in this year’s study continue to navigate a complex investment landscape, most immediately around geopolitical risks but also notably around climate change and increasing levels of public debt,” said Martin Franc, CEO, Asia ex Japan.
“These longer-term risks have become more salient as inflation has fallen back towards central bank targets. Meanwhile, elections across major markets over the past year have proven difficult to predict, with such uncertainty clearly impacting investor sentiment. In this environment, we should expect investors to remain cautious at least until we have more political and policy clarity among the major world economies.” added Franc
Invesco’s study, which has become the leading bellwether for sovereign investor activity, is based on the views of 140 chief investment officers, heads of asset classes and senior portfolio strategists at 83 SWFs and 57 central banks, who together manage $22 trillion in assets.
SWFs view strategic competition between the US and China as likely to create opportunities for emerging markets to attract investment, forge new partnerships, and assert their economic and political influence on the global stage.
Invesco’s study also revealed a widespread view that Inflation and interest rates are set to stay higher than previously expected (43%) of SWFs and central banks expect inflation to settle above central bank targets, with just over half (55%) expecting targets to be met.
In total, 71% of SWFs and central banks anticipate interest rates and bond yields to remain in the mid-single digits in the long term, which is having a significant impact on SWFs’ long-term asset allocation plans by prompting greater caution on highly leveraged and growth-oriented investments due to uncertain borrowing costs.
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