Thoughts Of The Week
OMFIF Publish Global Public Investor Survey
A Global Public Investor Survey was conducted and published last week by the Official Monetary and Financial Institutions Forum. Here’s a summary of some of the key points:
- The Chinese Yuan is on course to become a much more influential part of the global financial system. 30% of central banks plan to increase Yuan holdings over the next 12 to 24 months. The Yuan’s rise is likely be a global trend but could be especially strong in Africa, where almost half of central banks are planning to increase their Yuan reserves.
- 20% of central banks plan to reduce their holdings of the US Dollar over the next 12 to 24 months, while over the same period 18% plan to reduce their Euro holdings.
- 75% of central banks thought monetary policy was having excessive influence on financial markets but only 40% thought these policies needed to be actively reconsidered.
- Only 59% of central banks would be willing to use more than 30% of their reserves in the event of a serious FX shock.
- 45% of pension funds are now invested in Gold compared with 30% in the last survey.
- Central banks, sovereign wealth funds and public pension funds (which make up so-called Global Public Investors, or GPIs) control a record $42.7trn worth of assets.
- Central bank reserves alone rose $1.3trn in 2020 to a new high of $15.3trn.
30% of Global Public Investors (GPIs) will reduce their exposure to developed market sovereign bonds while 20% plan to buy more emerging market government bonds in their search for higher yields.
- Just over a quarter of central banks will expand their corporate bond holdings and around a fifth will increase their allocation to equities.
- GPIs are also increasing demand for sustainable assets and becoming more active investors – around 92% of central banks invest in ‘green bonds’ and 21% already invest in ‘sustainable’ equities. 65% of central banks intend to add to their Green Bond exposure (vs 45% last year).
- One in ten central banks also said that sustainability was now their joint-most important institutional priority, although 50% still did not explicitly implement environmental, social and governance (ESG) considerations in their portfolios.
What conclusions can be drawn from all this?
Some argue GPIs have too much money, and are struggling to deploy it in a world where yields are falling and negative real interest rates are rising. The impact of the response to Covid is sending bond yields down while price pressures keep inflation rising.
ESG concerns are still not being taken seriously, with only 1 in 10 saying sustainability is a joint-equal priority, and at least half still doing nothing about it. Instead of GPIs funding large-scale ESG projects, most of the financial legwork towards sustainability may instead come from the private sectors tax burdens.
Despite the influence major central banks have on financial markets, the market crashes of 2008 followed by the response to Covid19 have strengthened their power base. The ownership of bonds and equities by the US Federal Reservce, European Central Bank and Bank of Japan is staggering.
Take a look at the survey here.
The Week That Was…
The latest report by the Global Sustainable Investment Alliance* shows sustainable investments totalling $35.3TN, 36% of all assets in five (US, Europe, Australasia, Japan & Canada) of the world’s biggest markets. The GSIA commented the growth is being fuelled by rising consumer expectations, strong financial performance and increasing materiality of social and environmental issues.
* Source 1
In the US, Flash July Manufacturing PMI powered ahead to an all-time high of 63.1*(June: 62.1). Services PMI fell sharply to 59.8 (June: 64.6) as firms reported a slowing due to labour shortages and difficulties acquiring stock.
* Source 2
The CBI’s quarterly survey of Manufacturers in the UK* revealed strong expectations for output growth over the next three months, highlighting surging employment and investment in factories but also acute inflation pressures.
* Source 3
While in Australia, June retail sales slumped (-1.8% m/m)* on the back of covid lockdowns and reduced mobility.
* Source 4