Sovereign wealth funds and central banks managing $22 trillion in assets foresee a boost in emerging-market assets due to rising geopolitical tensions, according to an annual survey by Invesco Asset Management. Two-thirds of respondents expect emerging-market returns to match or exceed those from developed markets over the next three years, with non-Western sovereign wealth funds particularly optimistic about the performance of developing assets. The survey, conducted among 83 sovereign wealth funds and 57 central banks in the first quarter of 2024, suggests that tensions between the US and China could favour developing countries. This shift is attributed to companies reconfiguring supply chains to mitigate risks from increasing trade barriers between the world’s two largest economies.
Investors are showing a preference for specific emerging markets rather than treating them as a homogeneous bloc. Emerging Asian countries, excluding China, are becoming favourites, with India standing out due to its large domestic market and growing middle class. Interest in India’s debt surged to 88%, up from 66% in 2022. Indonesia is also attracting more attention, with 47% of respondents looking to increase exposure to its debt, up from 27% in 2022, while interest in China has dropped to 35% from 71%.
Over half of the survey participants invest in emerging-market debt, with more than two-thirds holding both local and hard currency bonds, often through ETFs. Dollar-denominated government and corporate bonds from emerging issuers gained 3.4% this year, compared to a 1.3% loss on global aggregate debt and a 2.8% loss on US Treasuries, as per Bloomberg indexes.
The survey also highlights the growing popularity of private credit among sovereign investors, with two-thirds planning to increase their allocation in the coming year. This interest is driven by the sector’s strong performance and its role as a diversification strategy compared to traditional fixed-income investments. Fixed-income allocations have remained steady at 28%, while equity allocations have increased to 32% from 30% a year ago. Despite optimism about steady or accelerating global growth over the next 18 months and confidence in the US economy, investors remain wary of risks including geopolitical tensions and persistent inflation.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
