As of 2014, the UK was the most attractive market for sovereign investors but has fallen off the charts to fourth place behind Germany, USA, and India as shown in this 2022 study.
US and India have emerged as the two most sought-after investment grounds for sovereign wealth funds and public pension funds in 2022, according to research conducted by Invesco, a US-based independent investment management company. As of 2014, the UK was the most attractive market for sovereign investors but has fallen off the charts to fourth place behind USA, India, and Germany, as shown in this 2022 study.
Invesco has studied ten years’ worth of proprietary data on the activities of sovereign investors for the research published on Monday. Observations show that sovereign investors are among the world’s most influential investors, at present managing $33 trillion worth of assets, some of which have experienced a surge in allocations to private markets. Sovereign allocations to private equity, with the aim for diversification, have increased from 8% in 2013 to 22% in 2022. However, this allocation may start to slow with impending favorable fixed-income situations.
It was found that for the past ten years, average annual returns for sovereign investors have stood at 6.5%, and for sovereign wealth funds alone, the return was 10% in 2021. However, with massive global inflationary conditions and monetary policies, 2022 couldn’t hold the expanding trend.
Many countries have heralded into creating their own sovereign funds, following the vast success of the funds, especially development sovereigns. It was viewed merely as a custodian of state assets but now is conventionally owned by global investors fruiting aggressive returns.
Challenging times are ahead for sovereigns as tightened monetary policy shall result in asset prices tumbling down with long-term investors, with price retracement creating opportunities. A global leadership role is being played by sovereigns when it comes to climate change and energy transition. Middle east sovereigns are looking to focus on low-carbon solutions by investing in innovation.
The United States has always been a jewel ground for investments owing to steady economic growth, a strong dollar and stability in regulations. Over the past decade, investors have expressed a desire for balanced global exposure. Some investors believe they have been very reliant on the US markets, which has taken a toll during the 2022 equity market correction.
India has surpassed China on the grounds of popular emerging sovereign markets. India held ninth place in 2014 but has risen to second in 2022. A faint reason for this would be funds dedicated to Asian allocations trimming off China and concentrating them in India due to the country’s economic reforms and heavy demographics. China ranks in 6th place at present.
Head of Institutions at Invesco, Road Ringrow, states that demographic patterns have always been a key prospect with sovereigns. Long-term investors, conventionally, are more comfortable with political and currency risks arising in a country with rapid population growth. These markets are viewed to provide long-term opportunities in real estate and infrastructure.
The sovereigns have to compete with large institutional investors of private assets. The yield boost somehow offers a release valve. Liability sovereign fixed income allocations have gone down from 38% to 29%.
Mr. Ringrow mentions that over the past decade, sovereigns have evolved and adapted and have developed strategies to weather fluctuating markets and capitalize on any opportunities. 2022 has been an inflexion point with the market turmoil, and it will be essential for them to continue doing so over the years to come.