Sovereign funds walk away from Europe

The sovereign wealth funds (SWFs) and central banks are increasing allocation to fixed income, Chinese and alternative assets at the expense of European exposures, the Invesco Global Sovereign Asset Management Study has found.

Of these three, fixed income became the largest asset class for sovereigns, overtaking equities which went through a turbulent year in 2018, and saw an increase in allocations to 33 per cent in 2019 from 30 per cent a year before. 

At the same time, allocations to equities fell from 33 per cent to 30 per cent as 89 per cent of sovereigns said they expected the end of the economic cycle within the next two years as well as greater volatility and the prospect of negative returns from equities.

“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,” Invesco’s chief executive for Greater China, Southeast Asia and Korea, Terry Pan, said.

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“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.”

The study also confirmed that sovereign wealth funds and central banks, which participated in the survey, showed a growing appetite for Chinese assets. However, Asia pacific-based sovereigns revealed different trends than their global peers and increased exposure to equities as well as their allocation to North America.

Chinese assets grew in popularity amongst the sovereigns looking for more diversification, with equities continuing to be the asset class most favoured.

According to Invesco, an increased exposure to Chinese equities was the result of the government’s measures to open the market to foreign investors.

However, transparency remained a significant obstacle to higher allocations in China for foreigners. Additionally, for those funds that had no existing allocation to China the investment restrictions and currency risk remained the biggest hindrance.

On the other hand, economic attractiveness of Europe was declining for sovereigns due to slowing growth and rising political risks, with 64 per cent of respondents say that Brexit had an influence on their asset allocation decisions with a further 46 per cent of sovereigns admit that sovereign investors decreased allocations to Europe in 2018.