Sovereign wealth funds and other institutional investors continue to increase downside protection and active hedging programs, despite consensus being that global inflation has peaked.
Research conducted by State Street Corp. and the International Forum of Sovereign Wealth Funds, covering institutional investors with more $36.7 trillion in assets, showed that global investors are concerned that inflationary pressure will continue to be shaped significantly by the effects on supply chains of the conflict in Ukraine and the deterioration of the U.S. relationship with China.
Against this backdrop, asset owners have rotated out of fixed-income exposures and into emerging market equities, and have also increased cash holdings, a report of the research said.
Investors have also been increasing their foreign exchange exposure to U.S. and Canadian dollars since they consider inflation impacts to be less problematic for the U.S. market vs. Europe and the U.K., which the report said are expected to continue to suffer from high energy prices.
Investors have also been selling developed market equities since June 2022 to fund EM allocations, the research found.
Fixed-income investors have continued to prefer developed market sovereign debt. They have been overweighting the U.S. and eurozone debt and have been increasingly underweight U.K. gilts, Japanese government bonds and German bunds.
The research also showed that in private markets, fundraising has slowed across most strategies. In the first three quarters of 2022, buyout and venture capital funds raised $211 billion and $78 billion, respectively, while private debt funds raised $43 billion. In the first three quarters of 2021, buyout funds raised $397.1 billion, venture capital funds raised $136.7 billion and private debt funds raised $70.2 billion.
