SWFs target emerging Asia markets as geopolitical tensions mount
With geopolitical risk now outweighing inflation concerns, sovereign investors are strategically betting on countries poised to benefit from near-shoring trends and the global push for cleaner energy, Invesco's twelfth annual Global Sovereign Asset Management Study has found.
For the majority of the 140 surveyed chief investment officers and senior strategists at 83 sovereign wealth funds (SWFs), Asia is emerging as a focal point in this high-stake balancing act between political maneuvering and sustainable development, according to Rod Ringrow, head of official institutions at Invesco.
“Sovereign wealth funds are adapting their decision-making to emerging Asian markets generally in response to geopolitical tensions, adopting a more nuanced and differentiated approach that considers the unique characteristics of individual countries and regions,” Ringrow told AsianInvestor.
INDIA RISING STAR
“While select Asian markets have been subject to this recalibrated approach, others such as India have become a key priority for many due to its strong growth prospects and reform agenda,” said Ringrow.
Invesco’s study reveals a dramatic surge in interest in Indian assets, especially in the debt market.
Invesco
"88% of SWFs are interested in increasing their exposure to Indian debt, up from 66% in 2022, reflecting improved confidence in the country's economic prospects," added Ringrow.
Such a growing interest is not limited to debt markets. The sheer size of India's domestic market, its growing middle class, and increasing global competitiveness make it a go-to destination for various forms of investment, he said.
Given China's significant economic weight and unique characteristics, many SWFs are creating a separate allocation for China.
Also read: US firms decouple China operations amid geopolitical tension
“This strategy allows them to more precisely calibrate their exposure to China while also enabling a more focused approach to selecting and investing in other key Asian markets,” said Ringrow.
OPPORTUNITIES AMID TENSIONS
For the first time since the survey started in 2013, geopolitical tensions have surpassed inflation as the primary concern of sovereign investors.
A staggering 83% of respondents cited geopolitical tensions as a major risk to global growth over the next year, up from 72% in 2023.
Also read: Future Fund warns geopolitical risk now dominant market force
However, this shift is not entirely negative for emerging markets, according to Ringrow.
“Geopolitical shifts are seen as beneficial for emerging markets, with SWFs anticipating opportunities arising from great power competition and trends towards near-shoring and regionalisation,” he said.
The study finds that 67% of SWFs expect emerging markets to match or outperform developed markets over the next three years, indicating growing confidence in these economies despite global uncertainties.
“This dynamic particularly benefits markets with close ties to the United States, including India, South Korea and Vietnam, as these countries are well-positioned to attract investment as companies look to develop robust supply chains within friendly markets,” noted Ringrow.
ASIA GREEN ENERGY
From a global perspective, the emerging markets of Asia (ex-China) are seen as the most attractive region overall.
"In Asia, we see that investors are increasingly incorporating ESG considerations into their manager selection and even analysing physical climate risks in the investment process," Ringrow said.
The region's potential for renewable energy is particularly appealing. The study reveals that 35% of sovereign investors based in Asia regard renewable energy and cleantech as a priority allocation segment, while a further 29% are holding some form of investments in this area.
Also read: ADIA eyes India's burgeoning renewables sector
“Among the Asia-based sovereign investors allocating to energy – or low carbon – transition opportunities, several cited investment opportunities arising from both supply and demand constraints, including in wind, solar, as well as green data centres,” said Ringrow.
These investors emphasise that the transition will likely take time and are assessing their investment allocation options over the longer term, with a significant focus on market-specific considerations such as regulatory certainty in transition-related infrastructure.
“Meanwhile 14% of sovereign investors based in Asia have significant investments in carbon removal technologies, with a further 36% having some investments in this area.”
PUBLIC EQUITIES, PRIVATE CREDIT
Despite geopolitical concerns taking the lead, the "higher for longer" interest rate outlook continues to have an impact on the asset allocation strategies of SWFs.
The study shows that 66% of SWFs are ramping up their exposure to private credit, partly in response to high interest rate environment.
“Southeast Asia is seen particularly favourably, with 62% of SWFs considering the region attractive for private credit opportunities, followed by India on 55% and China at 30%,” said Ringrow.
Also read: Asia private credit lures global investors amid risk concerns
Overall, 50% of SWFs (and 80% of those based in Asia) believe the opportunity for private credit in emerging markets is better or equal to that in developed markets, he added.
SWFs are also increasing allocations to listed equities in response to higher interest rates and stubborn inflation.
“Emerging markets in Asia are potentially likely to benefit from this trend along with the greater desire for more global diversification,” said Ringrow.
“Within EM equities, investors are taking a nuanced view, looking to invest in particular countries or sectors rather than broad EM exposure, focusing on those markets expected to benefit from the trends identified above.”