Sovereign Investors Pivot Away From Europe Towards China, Study Reveals

·   Sovereign investors move to fixed income after a challenging 2018
·   Sovereigns’ performance weakens, but still outperform global markets
·   China’s attractiveness as investment destination increases
·   Central Banks increase reserves in Renminbi and gold
·   ESG considerations increase at both sovereigns and Central Banks

Hong Kong, 8 July 2019: Invesco today released its seventh Invesco Global Sovereign Asset Management Study, an annual in-depth report on the complex investment behaviour of sovereign wealth funds and central banks, which this year revealed an uptick in allocation to fixed income, Chinese assets and alternative asset classes at the expense of European exposures.

This year’s study was conducted face-to-face amongst 139 individual sovereign investors and central bank reserve managers across the globe representing $20.3 trillion of assets, of which 71 were central banks (versus 62 in 2018).

“We might have expected this year’s study to have revealed a clear change of sentiment by sovereigns to risk-off, defensive mode, but the findings are more nuanced and reveal regional variation,” said Terry Pan, CEO for Greater China, Southeast Asia and Korea at Invesco. “Fixed income has re-emerged as the primary allocation for asset owners, but a higher proportion of Asia Pacific respondents plan to either maintain or increase their exposure to equities. Meanwhile there is also clear global demand for Chinese assets including RMB reserves at central banks. This points to continued appetite for risk assets and a strategic approach to diversification.”  

Fixed income displaces equities as largest asset class for sovereigns 
2018 was a challenging year for sovereigns, as weak and volatile equity markets led to a decline in overall investment returns. On average, sovereign investors achieved returns of 4% in 2018 compared to 9% in 2017, although this still represented an outperformance over the broader market with the MSCI World Index falling 8.7% in US dollar terms during the year. 

Eighy-nine percent of sovereigns anticipate the end of the economic cycle within the next two years. This combined with volatility concerns and the prospect of negative returns from equities has led to increased fixed income allocations and more diversification in allocations to infrastructure, real estate and private equity markets.

Fixed income allocations increased to 33% in 2019 from 30% in 2018, becoming sovereigns’ largest asset class. Meanwhile, allocations to equities fell from 33% to 30%, marking the end of a five-year trend between 2013 and 2018 during which fixed income fell from 35% to 30% as equities posted strong gains. 

Asia Pacific-based sovereigns that participated in the survey revealed different trends than global peers. Such respondents plan to continue or even increase their exposure to equities as global respondents retreat from equities; 33% plan to increase allocation over the next 12 months (versus 22% globally) and only 6% planning to decrease exposure (versus 24% globally).  

Asia Pacific sovereigns also have been increasing allocation to North America, with all of the region’s investors saying that the US has increased in attractiveness over the last two years. 

Terry Pan commented further: “A major trend among this region’s sovereign asset owners is exposure to infrastructure. All of the region’s respondents hold some infrastructure assets versus 84% globally, and two-thirds of respondents plan to make further infrastructure investments outside of their home but still within the region in the next 12 months. This is welcome news for both developed and developing markets in the region, as they can access a deep pool of capital that is experienced and comfortable investing in a traditionally illiquid asset class.” 

Challenging equity markets in 2018 highlighted the limitations of market-cap weighted passive strategies, as well as some more basic factor strategies. Some of the most popular factor strategies such as value and momentum performed below sovereign expectations during 2018, driving a move away from single-factor approaches towards multi-factor positions that can better adapt to changing market conditions.

Sovereigns optimistic on China
China’s attractiveness rating for sovereign investors has improved more than any other major region since 2017. Despite 82% of sovereigns citing trade tensions as having had an influence on asset allocation decisions, China’s attractiveness as an investment destination over the next three years scored an average rating of 6.1 out of 10 among sovereign investors, a marked increase on 2017’s 5.2 rating.

Among Asia Pacific sovereigns, all respondents have some exposure to China; 80% have exposure to Chinese equities, 60% to Chinese fixed income and 50% to Chinese real assets.

The unique competitive dynamics of China are appealing for sovereigns seeking more diversification, with equities continuing to be the asset class most favoured. Approximately 90% of sovereigns with China exposure held Chinese equities, showing that the government’s measures to open the market to foreign investors are bearing fruit. Fixed income allocations are also likely to increase with Chinas inclusion in major bond indices and initiatives, such as Bond Connect, giving foreign investors access to the local bond market. 

Transparency remains a significant obstacle to higher allocations in China for sovereigns, while for those sovereigns with no existing allocation to China, investment restrictions and currency risk are seen as the main impediments.

Renminbi finds a bigger place in Central Banks reserve portfolios
Central Banks continue to diversify away from the negative yields of government bonds as well as the US dollar. The main beneficiary has been the Renminbi; between 2017 and 2018, allocations to China’s currency overtook the Australian and Canadian dollar, with 43% of central banks now holding it in their portfolios compared to 40% in 2018. Over a quarter (27%) of central banks expect to continue to increase Renminbi reserves in 2019, making it the most favoured currency for the year ahead, with increased allocations expected to be taken from the USD, EUR and GBP. Though USD remains the dominant reserve currency, allocations reached a 5-year low, falling from 62.7% of global currency reserves to 61.7%.

Meanwhile, the uncertain market environment, combined with an increasingly hawkish Federal Reserve, has also led many of Central Banks to increase allocations to gold. Central banks bought 651.5 tonnes of gold in 2018, the second highest annual total on record and up 74% from the year earlier. Over a third (35%) of central banks increased allocations over the last three years, with 32% expecting further increases over the next three years, but overall gold holdings remain steady at around 4% of overall reserve portfolios. 

Investors don’t see economic attractiveness in Europe
A combination of slowing economic growth and perceptions of rising political risk have led to a decline in the perceived attractiveness of major European economies. Brexit is now influencing asset allocation decisions for 64% of sovereigns, while internal politics in continental Europe are impacting decision for 46% of sovereigns. As such, nearly one third of sovereign investors decreased allocations to Europe in 2018 and a similar number are planning further decreases in 2019. Only 13% of sovereigns plan on increasing allocations to Europe this year, compared to a 40% allocation to Asia and 36% to Emerging Markets.

Environmental considerations move ESG firmly into the spotlight 
ESG is an increasingly important issue for sovereigns and Central Banks. The proportion of sovereigns with a specific ESG policy rose from 46% in 2017 to 60% this year. 

There has also been a shift in focus of the nature of ESG activity. While asset owners have, in the past, focused on issues of governance due to clearer risk and return benefits, these factors are now often assumed by ESG adopters. For sovereigns, environmental concerns are increasingly becoming the lead focus, with carbon emissions and climate change the single most important ESG issue.

Terry Pan added: “There is no doubt that ESG considerations are at the forefront of Asia Pacific sovereigns’ investment philosophy. While there remains a perception that ESG integration requires investors to accept lower rates of return, two thirds believe that ESG considerations also help mitigate investment risk. As asset owners and managers look more holistically at implementing an ESG framework, we expect that the whole of the investment process will begin to incorporate ESG considerations rather than in segregated products or mandates.”

Notes to Editors:
The full 2019 Invesco Global Sovereign Asset Management Study for Professional Clients can be found at:

This is Invesco’s seventh sovereign asset management study. In 2019 we conducted interviews with 139 funds: 68 sovereign investors and 71 central banks. The 2019 sovereign sample is split into three core segmentation parameters (sovereign investor segment, region and size of assets under management). The 2019 central banks sample is broken down by developed vs emerging market. Total assets of those sampled stands at $20.3 trillion as of March 2019.

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