Sovereign wealth funds shift to private markets and away from Europe

Oksana Patron

25 November 2022

A confluence of global political tensions and rising inflation and interest rates have seen sovereign wealth funds to reconsider their asset allocation, followed by the shift from fixed income and towards private market alternatives, notably real estate, private equity and infrastructure, according to Invesco’s tenth Global Sovereign Asset Management Study.

Invesco found that 59% of the respondents, which included 81 sovereign wealth funds and 58 central banks together managing US$23 trillion in assets, decided to reposition their portfolios while 71% said that allocation to private market alternatives were effective inflation hedges.

As far as asset classes were concerned, private equity and unlisted real estate were the two most popular classes towards which investors were planning to increase their allocations over the next 12 months, by 29% and 23%, respectively.

At the same time, respondents were most bearish on fixed income (-12%) and cash (-4%), while sentiment on equities remained broadly unchanged (+1%).

The study also found that wealth funds were likely to decrease their exposure to both developed Europe (19%) and emerging Europe (13%), due to the military conflict in Ukraine, and increase towards North America (33%) and Asia Pacific (23%).

Invesco’s chief executive officer for Greater China, Southeast Asia and Korea, Terry Pan, said that investors in Asia Pacific were closely watching how COVID restrictions in China would evolve, and while inflation across the region remained less of concern, there was still room for policy stimulus to support the economy.

Interestingly, the allocations towards RMB were expected to continue to grow even though the US dollar still remained the dominant global reserve currency among central banks and was steadily declining from 65.4% to 58.8% between 2016 and 2021.

However, at the same time, RMB allocations continued to grow to just 2.8% at the end of 2021, a majority (63%) of central banks currently had RMB allocations, with central bankers expecting a further increase of the RMB allocations within the next five years.

According to Invesco’s survey, central banks particularly recognised the growth of the Chinese RMB as a portion of global reserves, given the current freezing of Russia’s foreign exchange reserves.

Further to that, institutional investors remained largely agreeable that digital assets were not yet investable mostly due to volatility, according to 68% of respondents, and regulatory pressure (55%).

Additionally, sovereign wealth funds and central banks saw existing cryptocurrency as potentially threatened by the launch of central bank digital currencies (CBDCs), with the People’s Bank of China leading the effort to create its own digital RMB that could “facilitate greater efficiency in payment systems and ultimately support further allocations to RMB as a reserve currency”.

“With cryptocurrency banned in China as of 2021, the opportunity set around digital assets in Asia is naturally limited, however the digital RMB pilot programs could herald a major expansion of the currency for cross-border payments, thus increasing its overall appeal as a reserve currency,” Pan said.

“This is a potentially transformational technology that could portend major changes for central bank currency management.”