Sovereigns shift from debt to private markets amid inflation and uncertainty, central bank RMB allocations continue increasing

  • Inflation prompts asset allocation rethink; fixed income exposure cut in favour of private markets
  • Sovereign wealth funds expect to increase allocations to North America and Asia Pacific, away from Europe as Ukraine-Russia conflict dents confidence
  • USD remains key world reserve currency, but RMB allocations increasing 

Hong Kong, 18 July 2022 – Surging inflation has prompted sovereign wealth fund investors to re-examine their asset allocation, with private markets the main beneficiary, according to the latest Invesco Global Sovereign Asset Management Study (link). Now in its tenth year, the study details the views of 139 chief investment officers, heads of asset classes and senior portfolio strategists at 81 sovereign wealth funds and 58 central banks, who together manage US$23 trillion in assets*.

Sovereign wealth funds now see inflation, alongside global geopolitics, as the biggest threat to global growth over the next year. Two-fifths of respondents expect inflation in developed markets to remain stubbornly high over the next two years, a further two-fifths expect inflation to steadily decline, and just under a fifth anticipate stagflation.  There is some consensus that inflation should subside in the coming years, albeit above pre-pandemic levels, with over half of respondents (59%) expecting US inflation to average 3-4% over the next 5 years. 

Sovereign wealth funds are reconsidering their macroeconomic assumptions and adjusting investments accordingly as inflation and interest rates rise rapidly.  Most respondents (59%) have repositioned their portfolios in anticipation of further rate rises, reflected in the continued decline in allocation to fixed income and a corresponding increase in allocation to private market alternatives, notably real estate, private equity and infrastructure, which most (71%) respondents agree are effective inflation hedges.  Private assets now constitute, on average, 22% of sovereign wealth funds’ portfolios.

When asked which asset classes they intend to increase, maintain, or decrease exposure to over the next year, private equity was the most popular (net +29%), followed by unlisted real estate at +23%. By contrast, respondents were most bearish on fixed income (-12%) and cash (-4%), while sentiment on equities is broadly unchanged (+1%).

Terry Pan, Chief Executive Officer for Greater China, Southeast Asia and Korea at Invesco commented: “The confluence of factors driving uncertainty over the beginning of this year was unprecedented for many finance professionals, and it will take some time for risk-on sentiment to rebuild.  In Asia Pacific, investors are closely eyeing how COVID restrictions in China will evolve, as the government continues to pursue its ambitious economic growth target.  While we expect the market to remain volatile for some time ahead, with inflation less of concern across this region, there is still room for policy stimulus to support the economy.” 

Investors to increase exposure in North America and Asia Pacific; further central bank allocations to RMB expected

Sentiment around European investments has suffered as a result of the military conflict in Ukraine.  Developed Europe (19%) and Emerging Europe (13%) are the geographies to which sovereign wealth fund investors are most likely to decrease exposure. Respondents are most likely to increase exposure to North America (33%) and Asia-Pacific (23%).

Prior years’ findings have indicated a high level of interest in allocations to China.  The majority (52%) of sovereign wealth funds said that China was a more challenging place to invest than last year, while 33% of respondents agree that the interdependence of US and Chinese will mitigate underlying geopolitical risk. 

While the USD remains the dominant global reserve currency among central banks, allocations as a share of reserves had been steadily reducing for years, declining from 65.4% to 58.8% between 2016 and 2021.  Central banks recognize that the Chinese RMB will continue to grow as a portion of global reserves, especially following the freezing of Russia’s foreign exchange reserves. 

RMB allocations rose from 1.1% of central bank foreign reserves in 2016 to 2.8% at the end of 2021, and a sizeable majority (63%) of central banks now have RMB allocations.  Most central bankers see their position as underweight, intending to increase it in the next five years, while 29% believe the RMB will become a "true reserve currency” in the next five years (versus 29% who disagree). 

Digital assets remain too volatile, but digital central bank currencies present opportunities

Despite the widespread anticipation that institutional investors will embrace digital assets, sovereign wealth funds do not yet see them as investable. Just 7% of sovereign wealth funds have any exposure to digital assets, and much of this is through investments in underlying blockchain companies. Volatility (68%) and regulatory pressure (55%) are the most common concerns, and just 15% think that digital assets can act as a credible inflation hedge. 

Both sovereign wealth funds and central banks see existing cryptocurrencies 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.  Among central bank respondents, 55% agree that cryptocurrencies are threatened by the existence of CBDCs, compared to 31% of sovereign wealth funds. 

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

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Important information

This article is for trade press for informational purposes only. Circulation, disclosure, or dissemination of all or any part of this article to any person without the consent of Invesco is prohibited.

This is Invesco’s tenth sovereign asset management study. In 2022 we conducted interviews with 139 funds: 81 sovereign investors and 58 central banks. The 2022 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 2022.

*Sourced by NMG Consulting: total assets of those sampled stands at $23 trillion as of March 2022.

All data are sourced from Invesco dated 31 December 2021, unless otherwise stated. This document contains general information only. It is not an invitation to subscribe for shares in a fund nor is it to be construed as an offer to buy or sell any financial instruments. Nor does this constitute a recommendation of the suitability of any investment strategy for a particular investor. While great care has been taken to ensure that the information contained herein is accurate, no responsibility can be accepted for any errors, mistakes or omissions or for any action taken in reliance thereon. Investment involves risks. Past performance is not indicative of future performance.

The distribution and offering of this document in certain jurisdictions may be restricted by law. Persons into whose possession this document may come are required to inform themselves about and to comply with any relevant restrictions. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorized or to any person to whom it is unlawful to make such an offer or solicitation.

Where Terry Pan has expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

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