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Sovereign Investors to U.K.: No Thanks

Sovereign wealth funds, state-owned pensions, and central banks polled by Invesco say the U.K. market is not as safe an investment as it used to be, owing to Brexit.

  • Joe McGrath

Sovereign investors now consider the U.K. less attractive than they did a year ago and are instead favoring investments in Germany and India as part of a broader move to so-called safe haven markets, according to a new report.

In its fifth annual survey of these investors, fund firm Invesco Asset Management polled 97 individual sovereign investors — sovereign wealth funds, state pension funds, and central banks — managing a combined $12 trillion in assets. Of these investors, 58 were asked which markets they believed to be the most attractive, with 10 the highest score and one the lowest.

The U.K., which scored 7.5 in the same poll last year, fell to 5.5 this year, with the country’s decision to leave the European Union cited as the main reason for the decline. Germany, by comparison, was viewed as a more attractive market in terms of offering security and long-term growth, with the country’s rating increasing from 7 in 2015 to 7.8 in the 2017 poll.

Alex Millar, head of EMEA Sovereigns at Invesco Asset Management, tells Institutional Investor that the U.K.’s fall in the rankings was to be expected, given sterling’s weak performance against the dollar.

“I suspect things like Brexit do increase the perception of tail risk events around Europe and, if there was to be a Eurozone break up, Germany would be one of the safest places to be,” he said. “It has one of the most developed financial markets in Europe.”

In developed markets, uncertainty over global interest rates has shifted the focus of sovereigns toward finding markets where assets can be sheltered, the report found. However, in emerging markets, sovereigns are identifying countries with the greatest potential for long-term growth.

Two out of four of the BRIC nations — Brazil, Russia, India, and China — became more attractive to sovereign investors between 2015 and 2017. Russia’s polled score rose from 4.1 in 2015 to 5.1 in 2017, while India’s climbed from 5.6 in 2015 to 6.1 in 2017.

Increasing emerging market exposure has become a long-term priority for sovereigns, according to this report, with India proving to be particularly popular in this year’s survey. Sovereign investors said they are considering accessing India’s private market through private equity or by taking direct stakes in the country’s industry.

“Despite sovereign desire to invest directly in Indian private equity, the development of local management capability is often complex and deployment of assets to meet targets will be lengthy,” the report said. “While concerns remain over governance and liquidity of private equity investments in emerging markets, sovereigns note that local management teams are best equipped to deal with these concerns.”

Another significant shift in sovereign allocations occurred in the real estate sector. This year’s survey found that the asset class is now widely seen as the preferred income-generating alternative to fixed income.

The findings showing an increase in real estate investing echo those of a Preqin report released earlier in the year, which found that 63 percent of sovereigns are investing in real estate in 2017, compared with just 59 percent in 2015. This is significant because inflows into sovereign wealth funds have fallen, and some are even facing withdrawals.

The investors surveyed by Invesco said real estate offered them the “scope to capture liquidity alpha” and the potential to “generate income matching to mid- and long-term liabilities.”