The fifth Invesco Global Sovereign Asset Management Study has identified expectations around Donald Trump’s policies as making the US particularly attractive to sovereign wealth funds and central banks, but that Brexit uncertainties have undermined the UK as a destination.
Based on a survey of 97 sovereign investors and central bank reserve managers representing $12trn of assets, the Study asked them to identify the relative importance of different economic and geopolitical factors.
Low interest rates are driving these investors to seek out alternative sources of income, but with uncertainty over the precise impact of a normalisation of monetary policy away from quantitative easing, there has been a rise in the importance of factors such as Brexit and the US election results as they affect allocation decisions, the Study notes.
Alex Millar, head of EMEA Sovereigns, Middle East and Africa institutional sales at Invesco, commenting on the Study results noted that the past year saw “lots of politically unexpected events.”
That said, the Study found 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% planning to overweight further in 2017.
“Trump has talked about tax reform and infrastructure investment objectives,” Millar said, adding that this potentially makes property more interesting, while tax reform would improve the performance of assets, making the US attractive.
“Infrastructure is an interesting area, but sovereigns have found it difficult to fill their infrastructure objectives,” he continued.
“The US has poor infrastructure; last year saw the start of hopes for investing into US infrastructure, this year we have been looking for evidence, such as [the Saudi Public Investment Fund], turning hope into action.”
“The Trump impeachment suggestion didn’t come up really. Sovereigns are looking to government overall.”
While expected allocations to the US remain high, this is not the case for the UK.
The key factor here is Brexit, with investors citing uncertainties around import taxes and market access to the European single market causing a downturn in the relative attractiveness of the UK as an investment destination for sovereign investors.
That said, the Study found continued long-term commitment to existing UK investments, particularly around property and infrastructure projects involving businesses such as Thames Water and Heathrow Airport.
“Sterling is down about 20% vs dollar,” Millar notes.
“Nobody seems to be panicking or selling; it’s very much a ‘wait and see’. There is no particular sense of London vs non London. So, no sense whether [the commitment] is London-centric or not.”
While the UK is seen as less attractive in light of Brexit, there are no such concerns about Germany, which despite a fall in allocations to Continental Europe overall during the past year, has managed to retain its save-haven status.
“There is a slight tinge of Brexit here; it reminds people of tail risk,” Millar said.
“Not that a eurozone breakup looks likely, but Germany would be considered a safehaven from something like this, hence remains relatively strong. It has a strong industrial base, providing opportunities for investments. It is also a platform for entering the eurozone.”
Amid the ongoing challenge of finding yield generally, there has been a shift in attitude towards property as an asset class through which to find income.
It is seen as something that can act as a long duration inflation-proof asset, while its role has shifted from offering a way to access illiquidity premia to being used more as an income capture/yield generator, Millar said.
That said, there is still an execution challenge, Millar added: “It still takes two years from inception to execution, to get the asset into the portfolio.”
“So, it is one thing setting asset allcation budget, but another to achieve this in property, private equity, infrastructure. Property is probably the least worst in terms of how long it takes.”
For further information on the Study, visit: http://igsams.invesco.com/