Sovereign investors are increasingly looking to China, with nearly three times as many planning to raise exposure in emerging markets rather than Europe. Sovereigns have also moved away from equities in favour of fixed income after a challenging 2018 for the asset class.
Slow economic growth and perceptions of rising political risk in Europe has seen a decline in the attractiveness of the region’s economies.
Just over 10% of sovereign wealth funds plan on increasing allocations to Europe this year, compared to 40% allocation to Asia, and 36% to emerging markets, according to a study by fund manager Invesco.
Ongoing uncertainty surrounding Brexit is now influencing asset allocation decisions for over 60% of sovereigns, according to the report.
As Europe falls out of favour, interest in China increased more than any other major region since 2017, despite more than 80% of sovereigns saying trade tensions influence asset allocation.
“The shift toward China, at a time when trade wars are adversely impacting equity markets, demonstrates sovereigns' ability to look past short-term geo-political skirmishes driving the news agenda and capitalise on core dynamics, in this case the continued maturing of the world’s second largest economy,” said Alex Millar, head of Europe, Middle East, and Africa distribution and sales at Invesco.
After a decline in overall returns from weak and volatile equity markets, allocations to fixed income has increased to 33% making it the largest asset class among respondents of the report involving 139 sovereign investors (of which 71 are central banks) representing $20.3 trillion of assets.
Volatility in the equities market, as well as the prospect of negative returns, has also seen more diversification in allocations to infrastructure, real estate and private equity markets.
Sovereigns and central banks are being more defensive and diversified in their portfolios as they prepare for an end to the current economic cycle anticipated by nearly 90% of sovereigns to finish within two years.
Environmental, social and governance (ESG) considerations are also becoming increasingly important for sovereigns and central banks.
Since 2017, the number of sovereigns with a specific ESG policy increased from 46% to 60%, while 20% of central banks now have an ESG policy, compared to 11% in 2017.
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