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.
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2 Sourced
by NMG Consulting: Total assets of those sampled stands at US$12.08
trillion, as at year-end 2016.
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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.
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In Canada, the Invesco Global
Sovereign Asset Management Study is restricted to accredited
investors as defined under National Instrument 45-106.
For more information, please visit invesco.ca. You can
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© Invesco Canada Ltd., 2017
SOURCE Invesco Canada Ltd.