(Bloomberg) -- Sovereign wealth funds and central banks that oversee US$22 trillion in assets expect emerging-market assets to benefit from rising geopolitical tensions, an annual survey by Invesco Asset Management shows.
Two thirds of the respondents expect emerging-market returns to match or beat those from developed markets over the next three years, with non-western SWFs more keen on the relative outperformance, according to the survey conducted among 83 sovereign wealth funds and 57 central banks during the first quarter of 2024.
The idea is that tensions between the U.S. and China favor developing countries as companies shift supply chains across locations and suppliers amid concerns over rising trade barriers between the world’s two largest economies.
Investors aren’t treating developing markets as a homogeneous bloc, with emerging Asian countries, excluding China, becoming a favorite. India in particular has become the top play thanks to its large domestic market and growing middle class, with 88% of respondents expressing interest in increasing exposure to the country’s debt, up from 66 per cent in 2022.
Indonesia is also getting more interest with 47 per cent looking to increase exposure to its debt, up from 27 per cent in 2022, while China saw a decline to 35 per cent from 71 per cent, according to Invesco.
Over half of the survey’s participants invest in emerging-market debt, with more than two thirds of these holding both local and hard currency bonds, often through ETFs. Dollar-denominated government and corporate bonds from emerging issuers gained 3.4 per cent this year, compared with a 1.3 per cent loss on global aggregate debt and a 2.8 per cent loss on U.S. Treasuries, Bloomberg indexes show.
The survey also showed rising popularity of private credit among sovereign investors, with two-thirds of them planning to increase their allocation in the coming year. The interest can be attributed to factors such as the sector’s “strong performance” and its use as a diversification strategy compared with fixed-income.
Overall, fixed-income allocations remained steady at 28 per cent while equity allocations increased to 32 per cent this year from 30 per cent a year ago, the survey showed. The optimism about steady or accelerating global growth over the next 18 months, and confidence in the U.S. economy, is tempered by a range of risks including geopolitical tensions and sticky inflation.
The impact of geopolitics — including discussions over whether to confiscate currently frozen Russian reserves to help Ukraine — are pushing central banks toward gold, according to the survey. Nearly half of the respondents also said that rising U.S. debt levels have increased the metal’s appeal.
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