Covid-19 impact and low interest rate environment prompt fundamental shift in asset and currency allocation plans of many of the world’s most influential investors
The renminbi is on course to become a much more influential part of the global financial system as central banks add the Chinese currency to their reserve assets. Some 30% of central banks plan to increase their renminbi holdings over the next 12-24 months, compared to just 10% last year, while 70% will increase their involvement over the longer term.
Central banks in all regions will be net buyers over the medium-term, especially in Africa, where almost half plan to increase their renminbi reserves. Asian assets more generally are in high demand, with 40% of global public investors expecting to increase their exposure to the region. Meanwhile, 18% of central banks plan to reduce their euro holdings over the next 12-24 months, and 20% expect to reduce their dollar holdings over the same time period as the low-yield environment continues to bite.
The results were revealed as part of OMFIF’s annual Global Public Investors report. OMFIF surveyed more than 100 GPIs – central bank reserve managers, sovereign funds and public pension funds – on their asset allocation strategies, investment approaches and market trends. This was a 30% rise in respondents compared to last year.
The report also showed the dramatic impact Covid-19 and the lower-for-longer rate outlook is having on a group of investors that have, across the industry, $42.7tn of assets under management. Trends in diversification – to boost or maintain returns, or to incorporate a more sustainable investment approach – are accelerating, the survey revealed.
For example, 26% of central banks plan to expand their corporate bond holdings and 21% will increase their allocations towards equities. In their search for yield, close to 30% of GPIs overall will reduce their exposure to developed market sovereign bonds, while more than 20% plan to buy more emerging market government debt.
GPIs are helping to increase demand for sustainable assets and becoming more active investors. Some 92% of central banks invest in green bonds and 21% already in sustainable equities. Around 65% of central banks plan to add to their green bond holdings (up from 45% last year). One in 10 central banks say sustainability is now their joint-most important institutional priority, although 50% still do not explicitly implement environmental, social and governance considerations in their portfolios.
A strengthened push to green and grow GPI assets comes as they reach their highest level ever. At the end of 2020, they stood at $42.7tn among the 850 institutions covered by the report. Central bank reserves have also risen to record highs, standing at $15.3tn as of the end of 2020, compared to $14tn at the conclusion of 2019, in spite of the pandemic. Public pension fund assets continue to rise, reaching $18.1tn from $17.2tn as of the beginning of 2021, with the majority of assets concentrated in North America ($9.1tn) and Asia ($4.8tn). This is partly on account of stellar returns on riskier assets, such as equities, which experienced a stunning post-pandemic resurgence. The same holds true for sovereign fund assets, albeit at a slower pace. Their assets grew by just under 4% to $9.3tn from $9tn.
GPIs revealed increasing concerns about the stability of financial markets and the risks of their diversification drive. Just over 40% of public pension funds believe that their peers are taking on excessive risk. This is in part due to the role of monetary policy: 75% of central banks and more than 80% of pension funds believe monetary policy is having an excessive influence on financial markets and pricing.