The global economic recovery and the boom on capital markets increased the assets of public investment institutions by USD2.5 trillion last year.
Central banks and sovereign funds in Europe achieved the best results. The only institutions that experienced a decline in the level of assets were the Middle East ones. The OMFIF think thank analyzed the asset management strategies of 750 public investment institutions around the world – central banks, sovereign funds and public pension funds. In total, they hold assets worth USD36.2 trillion, which corresponds to 45 per cent of the global GDP. These institutions have an enormous influence on global markets. In 2017, the value of assets managed by these entities grew by USD2.5 trillion, which represents an increase of 7.3 per cent compared to 2016. This was possible due to the recovery in the global economy, and especially in developed markets.
According to the “Global Public Investor 2018” report, the majority of institutional investors are in Europe and North America, where 245 and 221 of these institutions are located, together accounting for almost 50 per cent of all assets held by public investors in the world.
The Bank of Russia was the global leader, in terms of gold purchases, and its reserves of the precious metal exceeded even those of the People’s Bank of China In Asia there are 118 such institutions, however, it’s the region with the largest pool of assets under management, valued at USD13.7 trillion (38 per cent of all assets managed by institutional investors). The remaining spots are occupied by public investors from the Middle East (11 per cent), Latin America (4 per cent) and Africa (2 per cent).
European institutional investors also recorded the largest increase in the value of assets under management, by 11.8 per cent (up to USD7.6 trillion), which was mainly the result of an increase in the level of foreign exchange reserves held by central banks and an increase in the price of gold.
The amount of gold held by central banks around the world increased by a total of 371 tons, and the total level of gold reserves amounted to 31,800 tons. This is the highest level recorded since the 1990s. The Bank of Russia was the global leader, in terms of gold purchases, and its reserves of the precious metal exceeded even those of the People’s Bank of China.
According to Financial Times, 264 tons of gold have been acquired by central banks this year alone, with Russia, Turkey, and Kazakhstan dominating the market — the three countries purchased a total of 226 tons.
The assets of Asian institutional investors increased by about USD950bn. That region has become a global center for asset allocation, because the three largest global institutional investors operate there: the People’s Bank of China, the Japanese Government Pension Investment Fund and the Bank of Japan.
2017 was bad for central banks in the Middle East, which were the only ones to experience a decline in the value of assets under management. Their economies struggled with low commodity prices, geopolitical instability and the resulting pressure on their currency exchange rates.
In addition to the good economic climate, the valuation of assets was also supported by the capital market. The share of company stocks in the investment portfolios of sovereign funds and pension funds accounted for 40 per cent and 36 per cent, respectively. However, a quarter of the investors are planning to exit the market over concerns regarding excessively high and unstable valuations. At the same time, the same percentage of institutional investors are planning to increase their exposure to the stock market.
Some 18 per cent of public investors surveyed by OMFIF intend to increase their exposure to China’s currency over the next year or two years, and no institutions plan to reduce their exposure to the renminbi. Additionally, an increasing number of public institutions invest in sustainable assets, and 36 per cent of them plan to increase investment in so-called green securities (stocks or bonds).
In the analyzed period, real estate and infrastructure investments were also highly popular. This was motivated by the search for profit in the environment of loose monetary policy and low interest rates. According to public investors, these conditions have led to lower bond yields and questioned traditional asset allocation strategies. They have also created a growing imbalance between debtors and creditors, contributing to the build-up of tensions in international trade and investment.
The issue of normalization of the monetary policy by major central banks in the world is one of the main topics of interest for global institutional investors, much like macroeconomic conditions and the ongoing digital revolution — all these issues have a significant impact on their asset allocation strategies.