Sovereign investors around the world are raising their heads ever higher above the international financial parapet.
The top 400 global public investors across 162 countries have $29 trillion of assets (including gold) — equivalent to 40% of world gross domestic product, according to research by the Official Monetary and Financial Institutions Forum.
Of the total, 157 central banks hold $13.2 trillion, 87 sovereign funds $6.5 trillion and 156 public pension funds $9.5 trillion.
This week in Doha, Qatar, some of the largest asset owners, the members of the International Forum of Sovereign Wealth Funds, with its secretariat now based in London having moved from Washington during the summer, stage their annual meeting. Some of the biggest state owners of international assets, however, will not be there — even though some of them are taking on increasingly sovereign fund-like behavior.
These include the top three — the People’s Bank of China (which includes Beijing’s fabled State Administration of Foreign Exchange), with $3.88 trillion of assets, the combined Japanese Ministry of Finance and Bank of Japan, with $1.27 trillion, and the Japanese Government Pension Investment Fund (GPIF) with $1.25 trillion.
Absent, too, will be Saudi Arabia’s two investment behemoths, ranked No. 5 and 6 in the list of global public investors, the Arab Authority for Agricultural Investment and Development ($757 billion) and the Saudi Arabian Monetary Agency ($676 billion).
Two central bank reserve giants from Europe, the Central Bank of the Russian Federation ($510 billion as of the end of last year) and the Swiss National Bank ($480 billion), the ninth and 10th largest global private investors, are also not classified as sovereign funds and will not be making the journey to Doha.
The SNB, with one-sixth of its foreign-exchange reserves invested in international equities (including a significant portion invested in emerging markets), has built up a vast currency hoard owing to heavy foreign-exchange intervention to hold down the Swiss franc — exhibiting many common behavioral patterns compared with the world’s classic sovereign funds from the Middle East and East Asia.
These different categories of public-asset owners, all increasingly exposed to the buffetings of international capital flows, can of course play stabilizing roles on financial markets, but they are arguably adding as much as private investors to sources of volatility.
Yet there are no common rules and conventions to govern their investment approach — just one symptom of the uncoordinated state of the world monetary system. Many of the funds face dilemmas on how to allocate resources according to domestic as opposed to international requirements.
Sovereign funds from energy exporters, faced with falling oil prices CLZ4, -0.63% , are doubly squeezed — by pressures to shore up domestic budgets and demands to glean rewards from foreign investment.
Low interest rates on conventional investments in the U.S. and European bond markets have propelled many funds, including some normally staid central banks, to start investments in equities. Sovereign funds and pension funds have tried to escape the low yield trap by stepping up allocations to real estate and infrastructure in different parts of the world.
So much so that, particularly for “trophy assets” in major centers like London and New York, seasoned sovereign investors speak of a real danger of asset market bubbles.
Another bandwagon that the sovereign investors have joined is the rush to invest in a currency that will surely become a major reserve asset in coming years — the Chinese renminbi USDCNY, -0.07% . At least 60 central banks and sovereign entities from around the world now hold at least small volumes of renminbi — even though the currency is still formally classed as non-convertible.
The attraction of the Chinese currency is that it offers a relatively healthy yield as well as the prospect of longer-term appreciation against major international currencies. At a time when the yen USDJPY, +0.45% and the euro EURUSD, +0.06% look structurally weak in the next 12 months, the renminbi might offer some superficial attractiveness.
But with the dollar DXY, +0.05% likely to continue its recent firmness, and China showing likely further economic deceleration, Beijing’s currency, like the euro and the yen, could be vulnerable to a bout of severe weakness next year — a significant jolt for official investors that have just started out on Chinese experimentation.
If this happens, a number of official investors might decide that there is considerable respite in the staple diet of central banking investment over the years — the dollar and gold GCZ4, +0.11% .
This has been the traditional asset mix of one of the most successful central banks of recent decades, the German Bundesbank — an eminently conventional formula that so far has stood it in good stead.
marketwatch.com
The top 400 global public investors across 162 countries have $29 trillion of assets (including gold) — equivalent to 40% of world gross domestic product, according to research by the Official Monetary and Financial Institutions Forum.
Of the total, 157 central banks hold $13.2 trillion, 87 sovereign funds $6.5 trillion and 156 public pension funds $9.5 trillion.
This week in Doha, Qatar, some of the largest asset owners, the members of the International Forum of Sovereign Wealth Funds, with its secretariat now based in London having moved from Washington during the summer, stage their annual meeting. Some of the biggest state owners of international assets, however, will not be there — even though some of them are taking on increasingly sovereign fund-like behavior.
These include the top three — the People’s Bank of China (which includes Beijing’s fabled State Administration of Foreign Exchange), with $3.88 trillion of assets, the combined Japanese Ministry of Finance and Bank of Japan, with $1.27 trillion, and the Japanese Government Pension Investment Fund (GPIF) with $1.25 trillion.
Absent, too, will be Saudi Arabia’s two investment behemoths, ranked No. 5 and 6 in the list of global public investors, the Arab Authority for Agricultural Investment and Development ($757 billion) and the Saudi Arabian Monetary Agency ($676 billion).
Two central bank reserve giants from Europe, the Central Bank of the Russian Federation ($510 billion as of the end of last year) and the Swiss National Bank ($480 billion), the ninth and 10th largest global private investors, are also not classified as sovereign funds and will not be making the journey to Doha.
The SNB, with one-sixth of its foreign-exchange reserves invested in international equities (including a significant portion invested in emerging markets), has built up a vast currency hoard owing to heavy foreign-exchange intervention to hold down the Swiss franc — exhibiting many common behavioral patterns compared with the world’s classic sovereign funds from the Middle East and East Asia.
These different categories of public-asset owners, all increasingly exposed to the buffetings of international capital flows, can of course play stabilizing roles on financial markets, but they are arguably adding as much as private investors to sources of volatility.
Yet there are no common rules and conventions to govern their investment approach — just one symptom of the uncoordinated state of the world monetary system. Many of the funds face dilemmas on how to allocate resources according to domestic as opposed to international requirements.
Sovereign funds from energy exporters, faced with falling oil prices CLZ4, -0.63% , are doubly squeezed — by pressures to shore up domestic budgets and demands to glean rewards from foreign investment.
Low interest rates on conventional investments in the U.S. and European bond markets have propelled many funds, including some normally staid central banks, to start investments in equities. Sovereign funds and pension funds have tried to escape the low yield trap by stepping up allocations to real estate and infrastructure in different parts of the world.
So much so that, particularly for “trophy assets” in major centers like London and New York, seasoned sovereign investors speak of a real danger of asset market bubbles.
Another bandwagon that the sovereign investors have joined is the rush to invest in a currency that will surely become a major reserve asset in coming years — the Chinese renminbi USDCNY, -0.07% . At least 60 central banks and sovereign entities from around the world now hold at least small volumes of renminbi — even though the currency is still formally classed as non-convertible.
The attraction of the Chinese currency is that it offers a relatively healthy yield as well as the prospect of longer-term appreciation against major international currencies. At a time when the yen USDJPY, +0.45% and the euro EURUSD, +0.06% look structurally weak in the next 12 months, the renminbi might offer some superficial attractiveness.
But with the dollar DXY, +0.05% likely to continue its recent firmness, and China showing likely further economic deceleration, Beijing’s currency, like the euro and the yen, could be vulnerable to a bout of severe weakness next year — a significant jolt for official investors that have just started out on Chinese experimentation.
If this happens, a number of official investors might decide that there is considerable respite in the staple diet of central banking investment over the years — the dollar and gold GCZ4, +0.11% .
This has been the traditional asset mix of one of the most successful central banks of recent decades, the German Bundesbank — an eminently conventional formula that so far has stood it in good stead.
marketwatch.com
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