In a rapidly evolving financial landscape, public pension and sovereign funds are focusing on three major themes: the difficulty of balancing inflation control and growth stimulation, the appeal of private markets as a source of long-term returns and the urgent need to decarbonise portfolios.
OMFIF’s Global Public Funds 2024 examined the risks and opportunities facing this group of investors in the macroeconomic environment, exploring funds’ asset allocation strategies and the role of environmental, social and governance considerations. To launch the report, a panel of experts discussed the key findings of the research and provided critical insights for institutional investors.
Macroeconomic landscape growth amid uncertainty
A major theme that emerged from the panel discussion was the delicate balancing act between inflation control and growth stimulation. How can policy-makers juggle these priorities without tipping the scales?
GPF 2024 found that public funds are navigating these challenges by focusing on strategic fiscal measures and long-term economic planning. While easing from its peaks, inflation remains a significant concern in the US. Panellists emphasised the importance of calibrated fiscal policies, noting that excessive stimulus measures could reignite inflationary pressures, prompting further monetary tightening. John Normand, head of investment strategy at AustralianSuper, highlighted the risk of mis-calibrated US fiscal policies, which could lead to inflationary challenges over the next few years.
In Europe, Timo Löyttyniemi, chief executive officer of the State Pension Fund of Finland, pointed out the region’s unique path, emphasising the interplay between interest rates and growth prospects. While optimistic about short-term growth, he cautioned against the long-term implications of high sovereign debt levels and fiscal deficits. This concern resonated across the panel, reflecting broader apprehension over the sustainability of public finances globally.
Emerging markets presented a mixed picture. Jahangir Aka, head of official institutions at Neuberger Berman, noted a structural shift away from globalisation, compounded by currency and capital flow challenges. While emerging market equities continue to face headwinds, the report highlighted optimism for hard currency debt, which offers attractive risk-adjusted returns.
India, cited by 58% of respondents in the report, emerged as a standout market due to its favourable demographics and growing strategic investor interest. However, concerns over governance and systemic risks, epitomised by the ‘Adani effect’, are tempering the enthusiasm.
A tilt towards private markets
The panellists universally acknowledged the growing appeal of private markets, particularly private equity and infrastructure investments. In an environment of compressed public market returns, private assets offer diversification and potential for superior yields. Keiko Honda, a senior scholar at Columbia University, noted the increasing allocations by pension funds to private equity and infrastructure, driven by their ability to capture long-term growth and provide inflation-linked returns.
Infrastructure stood out as a vital asset class in GPF 2024 with 58% of respondents citing it as a priority area. Renewable energy projects, digital infrastructure and transition finance were identified as areas where investments align with both macroeconomic priorities and ESG principles. These investments not only capitalise on demographic and technological shifts but also mitigate inflation risks, making them a cornerstone of long-term strategies for sovereign and pension funds.
However, panellists cautioned against the inherent illiquidity and execution challenges of private markets. Pascal Lagarde, executive director at Bpifrance, stressed the importance of manager selection and scalability in navigating these markets. He also highlighted the rising trend of direct investments by sovereign funds, underscoring their growing sophistication and capacity to undertake complex transactions.
ESG driving change in investments
While enthusiasm for ESG investment peaked two years ago, it remains a key focus for long-term strategies. Climate change, in particular, emerged as a critical driver of asset allocation decisions.
Löyttyniemi shared Finland’s approach to reducing the carbon intensity of its portfolio, integrating climate metrics into investment decisions across public and private markets. Similarly, Lagarde emphasised the role of transition finance, supporting companies in their journey from ‘brown’ to ‘green’ operations. This approach not only aligns with global climate goals but also enhances the competitive positioning of businesses in a decarbonising economy.
Despite the momentum, challenges persist. Aka pointed out the tension between achieving ESG goals and maintaining financial returns, particularly in defined benefit systems. The lack of commercially viable projects that meet both ESG criteria and return thresholds was cited as a significant barrier. Nonetheless, the panellists agreed that integrating ESG considerations, particularly climate risk, into strategic asset allocation is no longer optional but essential for long-term resilience.
Within the global economic outlook, the US emerged as a dominant theme. Its economic resilience, driven by strong income growth, technological innovation and fiscal stimulus, makes it a preferred destination for global capital. However, panellists highlighted potential risks, including policy missteps under the new administration and geopolitical tensions, underscoring the need for caution and diversification in navigating US markets.
This perspective reflects the broader challenges and opportunities identified throughout the GPF 2024 discussions, emphasising the need for bold action and decisive strategies to secure long-term resilience and sustainable growth.
Yara Aziz is an Economist, Economic and Monetary Policy Institute, OMFIF.
Download Global Public Funds 2024. Watch the panel discussion on demand.
