Asia sovereigns look to increase equity exposure while global peers rotate to fixed income, reveals invesco study

· Sovereigns are using dry powder to capitalise on ‘unprecedented buying opportunity’ presented by pandemic
· Global investors cool on equities prior to Covid-19, instead favouring fixed income, illiquid alternatives and infrastructure projects to meet ESG objectives
· Asia sovereigns had lower equity exposure than global peers at end of 2019, look to increase exposure while global peers look more to fixed income
· Gold seen by central banks as potential replacement for negative yielding debt
· Climate change a growing concern, particularly among Asian and emerging market investors

Australia, Hong Kong, Japan, Singapore, 20 July 2020: Invesco today released its eighth annual Global Sovereign Asset Management Study, an in-depth report detailing the views of 139 chief investment officers, heads of asset classes and senior portfolio strategists at 83 sovereign funds and 56 central banks, who together manage $19 trillion USD in assets*.

Crisis presents opportunities, but equities overlooked
The Study revealed that many sovereigns were well prepared for the Covid-19 crisis, with a drop in valuations and plenty of dry powder making the crisis an unprecedented buying opportunity.  As custodians of long-term capital, most also benefited from the lack of an imperative to sell to meet withdrawals. Sovereigns were also better prepared due to changes they implemented and lessons they learned from the global financial crisis. This included building large cash reserves and making organizational improvements for the management of liquidity.

Before Covid-19 affected markets, sovereigns’ average equity allocation at the end of 2019 was 26%, their lowest level since 2013 both relative to fixed income (34%) and as an overall proportion of asset allocation. The movement away from equities was motivated in part by end of cycle concerns that led to decreasing strategic allocations. 

Globally over the next 12 months, 37% of sovereigns aim to decrease equity allocations, with half of these doing so by more than 5%. Just 22% of sovereign investors aim to increase their equity allocations over the next 12 months. 43% of sovereigns plan to continue allocating to fixed income, 43% to private equity & infrastructure and 38% to real estate.

Meanwhile, sovereigns based in Asia had lower exposure to equities than their global counterparts (19% vs 26%) and greater exposure to fixed income (38% vs 34%).  There are, however, signs that sovereigns are rebalancing towards equities, with 33% planning an increase in allocations.  Asia-based sovereigns are also increasing allocations to private markets including infrastructure (47%) and real estate (46%).

“The first quarter of 2020 presented sovereigns with a rare but classic exogeneous shock that spared few assets,” said Terry Pan, Chief Executive Officer, Greater China, Southeast Asia and Korea at Invesco.  “Given that Asian investors were already under-allocated to equities at the beginning of the crisis, and as we’ve observed a very strong recovery particularly in Chinese equities, I’m not surprised to see sovereigns more confident to invest in this asset class in the near term.”  

Climate change a growing concern, prompting greater investor focus
The study revealed that 83% of central banks and sovereigns believe immediate action is required to combat climate change, and this is increasingly being translated into investment strategies with an understanding that climate-related risk should be embedded into the wider investment process.

Among Asia-based sovereigns, 88% believe that institutional investors have an obligation to consider climate change in their portfolio, while 41% of sovereigns based in the region incorporate climate change in their portfolio (compared to 49% globally) and 13% attempt to capture their portfolio’s carbon footprint (versus 24% globally). Of the Asian investors incorporating climate change into their portfolio models, just 29% have developed a climate change risk model.  This is despite greater recognition of climate change as a risk to portfolios than in other regions - 65% of sovereigns based in the region believe that climate change presents a serious risk, compared to 47% globally.

The single greatest concern globally is a rising number of natural disasters; 88% of Asian and 75% of emerging market investors consider themselves to be disproportionately affected by climate change, far more than the West at 33%.

Mr. Pan commented: “ESG and climate change considerations continue to rise in priority for Asia sovereigns.  We see this especially in China, already the world’s largest issuer of green bonds, as market players are making substantial progress to develop and agree to a standardized ESG financing framework.  This would represent a major milestone for the industry, and although we are still some ways away from seeing market-wide agreement on how to implement ESG, I expect that Asia sovereigns will continue to progressively enhance their climate change risk modelling and carbon footprint analysis.”

Central banks pause diversifying to RMB, but long-term trend likely to continue
Central banks had, in recent years, been observed diversifying their currency reserves away from the US dollar, with perhaps the Chinese Renminbi (CNY) being the clearest beneficiary.  According to the International Monetary Fund, since 2016, allocations have doubled from 1% to 2% of allocations, representing a global increase of USD127 billion.

Despite this long-term trend towards more diversified portfolios, many central bankers in this year’s study initiated a flight back to the safety of US Dollars: while the number of banks holding renminbi rose very slightly, allocations remained relatively flat, as central bankers noted the limited convertibility of CNY as a major conern.  One-third of central bankers reported that they intend to increase USD reserves over the next year.

Nonetheless, the diversification trend is likely to continue in the long run, as 30% of banks still reported an intention to increase allocations at some point, once markets had calmed to more manageable levels.  Moreover, given the strategic importance of the Renminbi, and the inclusion of the currency in the IMF basket, it seems unlikely that banks will abandon the efforts that have already been made to incorporate the currency into reserves portfolios.

Covid-19 brings a rising interest in gold
This year’s study saw both central banks and a small but significant group of sovereigns increase their allocations to gold. On average, 4.8% of total central bank reserve portfolios are now allocated to gold,  up from 4.2% in 2019, and almost half (48%) of those that increased their allocations having done so with a view to it replacing negative yielding debt. This was seen as the most important reason for moving into gold above more commonly-understood reasons such as diversification, return and its role as an inflation hedge.

Sovereigns investing in gold have several options to acces the asset class, including futures (used by 40% of sovereign gold investors) and gold-backed ETFs (also 40%). 

Notably, just 18% of Asia sovereigns are permitted to invest in gold within their SAA framework, and half of those permitted to invest in gold do so. Despite this, a further 11% would consider adding gold to their portfolio in the future.  Most regional sovereigns investing in the asset class hold physical gold domestically (67%) while a third make use of futures and ETFs. 

Mr. Pan concluded: “While the health outlook for Covid-19 has improved slightly since the start of the year and a return to pre-virus levels of consumer behavior looks within reach, sovereign investors remain concerned over downside risks including potential new waves of local infections and additional lockdowns.  These measures could have lasting changes to consumer behavior, and a misstep in monetary policy support could stall any economic progress.  Although equity markets have recovered substantially since their lows earlier this year, I expect that volatility will remain very high through at least the rest of the year, which will keep sovereigns generally defensive while cautiously and strategically treading into equities as buying opportunities arise.”

Notes to Editors:
The full 2020 Invesco Global Sovereign Asset Management Study for Professional Clients can be found at:

*This is Invesco’s eigth sovereign asset management study. In 2020 we conducted interviews with 139 funds: 83 sovereign investors and 56 central banks. The 2020 sovereign sample is split into three core segmentation parameters (sovereign investor segment, region and size of assets under management). The fieldwork for this study was conducted by NMG between January and March 2020.  Total assets of those sampled stands at $19 trillion as of March 2020.

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