Concerns about rising interest rates and a global equity market correction will drive official institutions around the globe to further diversify their portfolios in coming years, with Asia likely to be a prime destination for those flows, said a survey by State Street Corp.
Conducted by Oxford Economics, the survey of 102 central banks, sovereign wealth funds and government pension funds showed institutions “adapting their investment and operating models to be more agile,” to better cope with the opportunities and risks of that diversification, said a State Street news release Thursday.
Kevin Wong, Hong Kong-based senior managing director and head of sector solutions for State Street's Asia-Pacific global services and global markets business, said today's volatile market environment is pressuring official institutions to become more nimble in evaluating and acting on investment opportunities.
Currently, official institutions in the Europe, Middle East and Africa region dominate the survey universe's top quintile — dubbed “nimble” institutions, with cultural strengths that allow them to flexibly build effective investment operations, Mr. Wong said in a telephone interview.
On that score, a number of official institutions in Asia have “room for improvement,” with governance structures for which the time needed to win approval from key constituents can leave them missing out on more fleeting investment opportunities, Mr. Wong noted.
Roughly 44 of the survey respondents were based in the EMEA region, followed by 35 from the Asia-Pacific region, 15 from North America and eight from Latin America.
Asia emerged as the region most likely to gain from further geographic diversification, with the 72% of respondents looking to increase allocations there over the next three years, well above the corresponding figures of 54% for North America and 41% for Europe.
The prospect of rising interest rates was the top concern cited by the 52 central banks surveyed, driving between 42% and 58% of respondents to predict rising allocations to commodities, corporate bonds and public equities. But 58% also anticipated flows to government fixed income, which Mr. Wong said could reflect expectations of growing allocations to Chinese bonds as that market continues to open to foreign investors.
The 50 sovereign wealth funds and government pension funds surveyed cited a correction for global equity markets as their top concern, and growing allocations to alternatives as a solution. More than half of respondents said they are looking to boost their investments in commodities, infrastructure and real estate, with private equity and hedge funds likewise poised to enjoy strong inflows.