India has emerged as the second-most coveted investment market after the US for sovereign wealth funds and public pension funds in 2022, according to a report by asset manager Invesco released on Monday. The report, according to Reuters, said sovereign investors, which now manage some $33 trillion in assets, have also seen a rapid rise in allocations to private markets.
“Over the last 10 years sovereign investors have invested with the wind at their backs thanks to the secular bull market that emerged from the global financial crisis,” said Rod Ringrow, head (official institutions) at Invesco.
According to the Invesco Global Sovereign Asset Management Study, average annual returns for sovereign investors in the past decade stood at 6.5 per cent and, for sovereign wealth funds alone, at 10 per cent in 2021. However, the current year became a turning point with higher inflation and tighter monetary policy hitting long-term expected returns.
“While this is partly because funds with dedicated Asian allocations are trimming their China exposure, investors have commended India’s positive economic reforms and strong demographic profile,” the report found.
According to the report, while the US remained the top destination, some sovereign investors were keen to rebalance portfolios, fearing they had become overly reliant on US markets which left them vulnerable to the correction in equity markets seen this year, Invesco said. Back in 2014, the UK was the most desirable destination.
“Inflation has surged. In March 2022, consumer prices across OECD countries rose 8.8 per cent, year-on-year, the fastest pace of increase in at least three decades, and at the time of writing were still trending upwards. This has already produced the largest year-to-date drawdown in bond market history. As a result, instead of shielding portfolios in a risk-off environment and sharp correction in equities, fixed income allocations have been a major contributor to negative performance,” Invesco said.
This positive correlation presents challenges for sovereigns as they look ahead. Or as one European investment sovereign put it, “The problem we have in bonds is that they’re not a great diversifier (against equities) when the Fed is raising, and when a crisis is bond driven. If we had an equity-driven event, that would be different, but the Fed is hiking quite aggressively to counter inflation and other central banks such as the ECB look set to follow, and that’s a problem for bonds as well as equities.”
About the Global Sovereign Asset Management Study 2022, Invesco said that running since 2013, this year study represents the views and opinions of 139 chief investment officers, heads of asset classes and senior portfolio strategists at 81 sovereign wealth funds and 58 central banks. Combined, these investors are responsible for managing around US$23 trillion in assets (as of March 2022).
Among developing nations, India has overtaken China as the most popular emerging market, having climbed to No. 2 in 2022 from No. 9 in 2014. China currently ranks in sixth place.
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