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Our reporter Tan Zhijuan reports from Beijing

The latest "Invesco Global Sovereign Asset Management Research" (hereinafter referred to as the "Research") released by Invesco recently shows that geopolitical tensions have surpassed inflation to become the most concerning issue for sovereign investors, and have increased sovereign investors' investment interest in emerging markets.

According to the study, 83% of respondents believe that geopolitical tensions are the main risk to global economic growth next year, up from 72% in 2023, reflecting concerns about competition between major powers and potential trade disruptions. Sovereign wealth funds see emerging markets as potential beneficiaries, believing that trends such as nearshoring bring them opportunities. As a result, 67% of sovereign wealth funds expect emerging markets to perform on par with or even outperform developed markets in the next three years.

A reporter from China Business News learned that this research by Invesco has become a weather vane for sovereign investor activities. The research brings together the views of 140 chief investment officers, heads of asset classes and senior portfolio strategists from 83 sovereign wealth funds and 57 central banks.

Martin Franc, CEO of Invesco Asia ex-Japan, said: “Respondents to this year’s study continue to face a complex investment landscape, with geopolitical risks being the most immediate, but also the impact of climate change and growing public debt being prominent. As inflation gradually falls back towards central bank targets, these longer-term risks will become more prominent.”

Gold’s appeal grows

Invesco Research said that central banks around the world are also feeling the impact of geopolitics and are increasingly increasing their holdings of gold to diversify their reserves and hedge against various risks.

The study shows that more than half (56%) of central banks believe that the potential weaponization of central bank reserves makes gold more attractive, while 48% believe that the growing US debt has strengthened the appeal of gold.

Central banks are also looking to increase their reserves over the next two years, motivated not only by prolonged geopolitical tensions but also by the upcoming major market elections. Central banks are watching the potential impact of election results, including triggering market volatility, currency fluctuations and changes in investor sentiment. As a result, 53% expressed an intention to increase the size of reserves over the next two years, while only 6% intend to reduce reserves.

The study also noted that the prospect of "interest rates remaining higher for a longer period" prompted caution in investing in leveraged asset classes.

The Invesco research also reflects a widespread view that inflation and interest rates will remain at higher levels than previously expected, with 43% of sovereign wealth funds and central banks expecting inflation to be above the central bank's target, while just over half (55%) expect it to be met.

Overall, the study said that 71% of sovereign wealth funds and central banks expect interest rates and bond yields to remain in the mid-single digit in the long term, which has a significant impact on the long-term asset allocation plans of sovereign wealth funds, as borrowing costs are uncertain, prompting sovereign wealth funds to be more cautious about highly leveraged and growth-oriented investments.

It is worth noting that infrastructure is the most popular asset class in the next 12 months, with a net asset allocation intention of 21%, followed by listed stocks (19%) and absolute return funds/hedge funds (12%). In contrast, sovereign wealth funds have reduced their investment intentions in cash (-11%), real estate (-6%) and private equity (-3%).

This outlook also boosts the appeal of private credit as an attractive alternative to traditional fixed income, with attractive yields and opportunities not available in the public markets. More than a third (36%) of sovereign wealth funds reported higher-than-expected returns on their private credit investments, with only 5% reporting that the asset class performed below expectations.

63% of investors highlighted that they view private credit as an attractive diversification option beyond traditional fixed income, and 53% believe it offers better value than traditional debt.

Martin Franc said: "For sovereign wealth funds, the 'higher rates for longer' environment is a significant paradigm shift. Global financial conditions have generally remained accommodative since the 'Great Recession' of 2007-2008, and some investment professionals have not experienced a period of high inflation and relatively constrained interest rates. We can see how this dynamic is changing the investment landscape for sovereign wealth funds, particularly in private credit. This also affects the risk-reward calculation for listed equities."

Energy transition is a priority theme for long-term investors

Invesco research shows that energy transition continues to bring challenges and opportunities to sovereign wealth funds and central banks.

The study said the energy transition was seen as an increasingly attractive investment opportunity, with 30% of sovereign wealth funds and central banks considering it a high-priority allocation theme and a further 27% holding some form of renewable energy and clean technology investment.

Martin Franc said: "In Asia, we see that investors are increasingly incorporating ESG (environmental, social and corporate governance) factors into their portfolio management choices, and even analyzing physical climate risks during the investment process, but they also generally avoid directly divesting from traditional energy assets. The energy transition will depend on how global investors face the current investment landscape."

MartinFranc also said, "It is expected that investors will adopt a 'holistic' investment approach, renewable energy and traditional energy assets will continue to be part of the allocation portfolio, and continued interaction and communication with energy companies will be an essential process on the road to transformation and ultimately achieving the net zero goal."

(Editor: Meng Qingwei Reviewer: Hao Cheng Proofreader: Zhai Jun)