OMFIF’s monitoring of public sector institutions’ investment strategies has been a guiding light over a decade of economic and financial market upheavals. With three major macro crises in 10 years – euro area tensions in 2009-15, Covid-19 in 2020 and Russia’s invasion of Ukraine in 2022 – our approach to gauging attitude and strategy shifts of central bank reserve managers and public pensions and sovereign fund managers has evolved in three stages.
From 2014-18, we analysed these groups together mostly qualitatively. In 2019-21, we ran an amalgamated, forward-looking survey before splitting this into two surveys in 2022: Global Public Investor and Global Public Pensions. Each stage has provided a reliable reading of the macro conditions and sentiment shifts of the time. But the 2022 GPI survey – due to be updated this June – has provided our most potent litmus test of how central bank reserve managers’ investment strategies are changing as their reserves climb (Figure 1).
Figure 1. Global central bank reserves in the ascendency
Global central bank reserves, $tn
Source: International Monetary Fund
In 2022, we surveyed 73 central banks globally, with combined reserve assets of over $5tn. This is equivalent to roughly a third of world central bank reserves, and about 1.5 times the gross domestic product of the UK. Our broader analysis of publicly available data covered as many as 171 central banks responsible for just over $16tn in reserves. This is equivalent to about two-thirds of US GDP or almost the total GDP of China. Combined with its sister GPP report published in November 2022, we monitored 320 public investors with $45tn in assets: approaching the combined GDP of the G3 economies.
Our 2023 GPI results will be important to see whether risk tolerance will hold up after last year’s surprisingly upbeat tone, given all responses were received after Russia’s invasion of Ukraine on 24 February.
2014: Driving world economic growth
The first GPI report was a ground-breaking analysis of 400 institutions handling publicly owned and managed financial assets across international markets. It found that allocating assets towards ‘alternative’ investments beyond public equity and fixed income was an accelerating trend among many funds.
2015: Real assets for the real economy
The 2015 edition extended the ranking table to 500 institutions with assets under management of $29.7tn, from 181 countries, equivalent to 40% of world GDP. It witnessed ‘an intriguing rebalancing of the make-up of the GPI community,’ with central banks’ share of the assets falling to less than half.
2016: Sustainable low carbon multi-currency investment
Investors highlighted gold’s renaissance as a traditional investment haven in 2016, with central banks’ purchases in the second half of 2015 accelerating to the highest-ever semi-annual rate – a result of purchases by institutions led by China, Russia and Kazakhstan, and a drying up of sales by developed country central banks. But the falling price of gold throughout the year meant it made a negative contribution to overall GPI assets under management.
2017: Global trade, green finance, growth economics
The fourth edition extended the number of institutions ranked to 750 and the coverage of asset classes to include: fixed income, green energy, fintech, public and private equity, non-traditional currencies, money markets, infrastructure and real estate. It explored the increase in green finance options; prospects of rising interest rates; the outlook for higher commodity and energy prices; the shift in US policy towards fiscal expansion; and the impact on investors of the UK’s vote to leave the European Union.
2018: Asset allocation, global flows, digital disruption
In 2018, the GPI featured six special reports on gold, global investment flows, sustainable investments, real estate and infrastructure, Islamic finance and digital currencies. It found that the trade deficit between the US and China widened in 2017 and that the growing trade imbalance provided a backdrop for escalating tensions between the two countries, with repercussions for creditors and debtors around the world.
The 2019 survey highlighted that public investors faced increasing challenges in considering the trade-off between risk and return in their allocation decisions. While there was a clear trend towards diversifying into new asset classes, it remained gradual and constrained by various obstacles including cost, board conservatism and lack of expertise. David Marsh, OMFIF chairman, wrote that central banks had ‘never been so powerful – nor so vulnerable’.
This edition of GPI increased the survey sample of public investors to 78, OMFIF’s largest up to that point. It found that the global economic shock from Covid-19 pushed central banks back towards safe assets after years of reserve diversification. Their stock of sovereign debt grew to 66% of reserve assets and gold holdings rose as well.
2021: Head first into the post-pandemic world
The survey of more than 100 GPIs found that that the renminbi was on course to become a much more influential part of the global financial system as central banks added the currency to their reserve assets. The report also showed the dramatic impact of Covid-19 and the lower-for-longer rate outlook, and how trends in diversification – to boost or maintain returns, or to incorporate a more sustainable investment approach – accelerated.
2022: Managing reserves in a world turned upside down
A major force in 2022 for market correction was Russia’s invasion of Ukraine. By far the bulk of respondents considered inflation and geopolitical tensions to be the dominant factors affecting their operations (Figure 2). On inflation, the majority expected it to remain high and volatile over the coming two years. This looks prescient, and is neatly consistent with the forecast horizon of most central bank rate setters. A significant share expected it to fall back and return to pre-Covid-19 levels. This suggested scepticism – again pre-empting developments – about economic growth prospects.
Figure 2. Inflation the top concern among central bank reserve managers
What are the three most important factors affecting reserve management in the current macro environment? Share of respondents, %
Source: OMFIF GPI 2022 survey
The composition of assets was revealing, with traditional risk-on assets still in vogue, and seemingly no rush for the door from less inflation-protected assets such as fixed income. Bonds (government, quasi-government and corporate) were still held, as were equities, gold and, to a lesser extent, cash, meeting an array of diversification needs (Figure 3). Other factors seemed to rule out increasing risk aversion in response to changing events. These included continued exposure to emerging markets, no scramble to further overweight the dollar and the intended increase in renminbi exposure from 2021’s level.
Figure 3. No rush for the exit away from fixed income
Over the next 12-24 months, do you expect to increase, reduce or maintain your allocation to the following assets? Share of respondents, %
Source: OMFIF GPI 2022 survey
So, there’s much to look out for in our 2023 survey. Questions remain around reserve managers’ intentions as we emerge from the relatively mild winter, hopes that US and UK policy rates may peak by summer and whether stagflation will start to ease. But reserve managers may follow the views of their pension and sovereign wealth counterparts surveyed in GPP 2022 in signalling a more bearish tone.
The results should be revealing. Equally fascinating will be how our analysis on reserve managers’ intentions evolves over the next 10 years.
Neil Williams is Chief Economist of OMFIF.
If you are interested in learning more about our research or if you represent a central bank interested in participating in our GPI survey, please contact research@omfif.org