Sovereign wealth funds move to bonds which in 2018 surpassed equities for the first time, becoming the leading investment asset class.
Invesco reveals it in the annual report "Invesco Global Sovereign Asset Management Study“, which analyzes the investment attitudes of sovereign wealth funds and central banks through direct interviews with 139 individual sovereign investors and central bank managers from around the world (71 central banks compared to 62 in 2018), representative of assets for 20,3 .XNUMX trillion US dollars.
Going into detail, 2018 was a difficult year for sovereign bonds, mainly due to the overall decline in yields. Despite this, sovereign investors still achieved a 4% return at the end of the year. A positive result, albeit significantly lower than in 2017 when yields had reached 9%, especially if we take into account thenegative stock performance which, according to the MSCI World index, recorded a decrease of 8,7% during the year.
“The majority of sovereign wealth funds (89%) expect the end of the economic cycle within the next two years – reads the report – This element, together with fears about volatility and the prospect of negative equity returns, has led to increase allocations to bonds and diversification in allocations to infrastructure, real estate and private equity markets”.
Speaking in percentages, the average bond allocation rose from 30% in 2018 to 33% in 2019. Equities recorded a perfectly inverse trend, falling from 33% to 30% and putting an end to a five-year trend (2013-2018) during which the bond sector lost importance (from 35% to 30%) while equities recorded strong increments.
Today bonds have therefore become the preferred investment of sovereign wealth funds from a geographical point of view, from 2017 to today they have focused mainly on China. “Since 2017 – explains Invesco – China's attractiveness for sovereign investors has grown much more than that of other regions. Some 82% of sovereign investors cited trade tensions as a factor influencing asset allocation decisions, yet China's attractiveness as an investment destination over the next three years scored a 6,1. 10 out of 5,2, up sharply from a 2017 rating in XNUMX”. At the root of this trend is above all Beijing's commitment to protect intellectual property, the inclusion of China in most bond indexes and initiatives, such as Bond Connect, "which will offer foreign investors access to the local bond". “Transparency – continues the report – remains a significant obstacle for sovereign wealth funds intending to increase their allocations to China, while for those without exposure to China, the main impediments are represented by investment restrictions and currency risk.
Turning our gaze to the Old Continent, the scenario changes radically. Political risks, the slowdown in growth, Brexit, the rise of populist movements are strongly affecting the asset allocation decisions of sovereign funds. "Consequentially Europe has fallen on hard times, and nearly one in three sovereign investors decreased their allocations in 2018 and a similar number intend to do the same in 2019. Speaking in percentages: in 2019, only 13% of sovereign investors plan to increase their allocations to Europe versus 40% which will increase allocations to Asia and 36% which will increase allocations to emerging markets.
For the central banks, the current uncertainty and the parallel aggressiveness of the Federal Reserve has caused many of them to find safety in their allocations to deposits and, in some cases, gold. In detail, last year central banks bought 2018 tons of gold in 651,5, the second highest peak ever (+74% compared to 2017). Not to mention that 32% expect further increases in the next 3 years, despite the difficulties related to gold as a reserve asset including volatility, storage costs and the political implications of the sale.
At the basis of the various strategies, however, there is not only gold, but also bank deposits. In this context "the main beneficiary was the renminbi Investco analysts continue, and between 2017 and 2018, allocations to the Chinese currency exceeded those to the Australian and Canadian dollars, with 43% of central banks now holding renminbi in their portfolios compared to 40% in 2018. Over a quarter (27%) of central banks plan to increase renminbi reserves in 2019; the Chinese currency is set to become the currency of choice in 2020, and the increase in this allocation is expected to come at the expense of the US dollar, the euro and the pound.
