U.K. less attractive post-Brexit
TORONTO, June 5, 2017 /CNW/ - Invesco today released its fifth Invesco Global Sovereign Asset Management Study,1 an annual in-depth report on the complex investment behaviour of global sovereign wealth funds and central banks. This year's study shows that geopolitical uncertainty and limited options to increase risk asset allocations are causing sovereign investors to make fewer allocation changes than at any point in the past five years, despite target-return gaps increasingly widening.
This year's study, conducted face-to-face among 97 individual sovereigns and central bank reserve managers across the globe, including Canada, representing US$12 trillion2 of assets, asked sovereigns to rate the importance of various economic and geopolitical factors on their investment strategies.
"Sovereign investors are a diverse group and challenges affect sovereigns differently according to their liabilities, risk appetite, funding dynamics and other factors," says Alex Millar, Head of EMEA Sovereigns & Middle East and Africa, Institutional Sales at Invesco. "Our study has once again illuminated how these diverse investors are responding to global trends as they become ever more sophisticated, yet limited by both external and internal constraints."
Sovereigns see low interest rates as the greatest tactical asset allocation factor, driving increasing allocations to real estate as they seek alternative sources of income generation. However, the longer-term implications are less certain with expectations of a gradual return from quantitative easing to quantitative tightening.
Brexit and the election of Donald Trump in the U.S. are expected to grow in importance for future allocations (set to increase in importance by 82% and 68%, respectively) as the implications of political shifts on investment performance becomes clearer.
Trump on top
Sovereigns have ranked the U.S. as the number one market in terms of attractiveness for the past three years, and this year the country retains its top spot with a score of 8.0 (out of ten). The U.S. is also the winner in terms of actual allocations, with 37% of respondents reporting overweight new flows to North America in 2016 relative to their total portfolio – higher than any other region – and a net 40% are planning to overweight further in 2017. This compares with only 4% who were underweight on new flows in 2016, and 4% who plan to do the same in 2017 – the rest (59% for 2016 and 56% for 2017) did not change or plan to change the weighting.
This attractiveness is driven largely by interest-rate rises as well as market confidence of a "pro-business" corporate tax regime following President Donald Trump taking office in January 2017. However, long-term confidence is still restricted by uncertainty around whether Trump will deliver on policy promises, and positive views on potential infrastructure investments in the U.S. are hampered by concerns about growing protectionism limiting access for foreign sovereigns.
Falling allocations to the U.K.
The U.K. saw the biggest drop in attractiveness to sovereigns, down to 5.5 from 7.5 last year. Brexit is seen as a significant negative for U.K. investment, and investment sovereigns3 with European interests questioned the future of the U.K. as an "investment hub" for Europe, given uncertainty over taxes on imports and market access.
Sovereign allocations to the U.K. were down in 2016: 33% of respondents reported being underweight on new flows to the U.K. (higher than any other region) compared with 13% who reported new overweight positions to the U.K., while the rest (54%) cited no change. However, when the fall of the pound is taken into account, U.K. allocations remain relatively stable, with stated allocation declines of -15% likely linked to the corresponding drop by 16% in the value of the GBP relative to the USD, rather than withdrawals. Furthermore, the fall in the value of the pound has led to a rally in U.K. stocks.
Germany is core to Continental Europe
A fall in sovereign allocations was seen in Continental Europe, from 12.8% of AUM last year to 11.2% of AUM this year as the risk of wider European Union disbandment appeared to be growing. However, Germany stands out from its European neighbours as one of the most attractive investment destinations globally for sovereigns, increasing from 7.0 last year to 7.8 this year. Germany's popularity is attributed to its perceived "safe haven" status and positivity towards Germany has increased based on its economic strength.
Real estate offers income as new contributions slow
The return environment has, on the whole, remained challenging for sovereigns who have, on average, underperformed their target returns by 2%. Over the past three years, governments have responded to poor economic performance by reducing new funding to sovereigns (on average, down from 8% in 2015 to 5% in 2017) and cancelling investments (down from -1% in 2015 to -3% in 2017).
"Last year was challenging for sovereign investors with concerns surrounding funding levels and return expectations remaining front of mind amidst added macro-economic and political uncertainty," says Millar. "Demand for alternatives like infrastructure has been a consistent theme in past years, but this year the challenge of increasingly scarce supply is compounded. While investors have fewer asset allocation levers with which to respond, they are delving deeper into more supply-rich real estate markets, and looking to the U.S. and Germany for opportunity and economic strength."
1 This is Invesco's fifth sovereign asset management study. In 2017, Invesco conducted interviews with 97 different sovereign investors compared with 77 in 2016. The findings have been validated using "common cohort" analysis of the 48 interviews conducted with the same firms in the past four years. In this study, Invesco defines sovereign investors as state-owned investors, which includes stand-alone Sovereign Wealth Funds (SWFs), state pension funds, central banks and government ministries.
2 Sourced by NMG Consulting: Total assets of those sampled stands at US$12.08 trillion, as at year-end 2016.
3 Economic challenges affect sovereigns differently, according to their liabilities, risk appetite, funding dynamics and other factors. The Invesco Global Sovereign Investor Model categorizes sovereign investors by basing its segmentation on investment objectives.
In Canada, the Invesco Global Sovereign Asset Management Study is restricted to accredited investors as defined under National Instrument 45-106.
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© Invesco Canada Ltd., 2017
SOURCE Invesco Canada Ltd.
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