U.S. election key event for wealth funds

The U.S. presidential election is the key event of the next 12 months and will shape future global investment opportunities, sovereign wealth funds say.

The International Forum of Sovereign Wealth Funds and Invesco surveyed 24 sovereign investors in late June, asking their views on the outlook for the next year and the impact that the coronavirus pandemic has had on the global economy.

Half of respondents expect Joe Biden, the Democratic candidate, to win the election in November. In that outcome, 58% of funds think the U.S. would return to a more multilateralist stance.

"That said, these respondents were evenly split on whether the U.S. would become more inward-looking or not — suggesting that some sovereign wealth funds believe that a President Biden would need to focus on U.S. domestic challenges in the wake of the Trump presidency and the damage caused by the pandemic," a report of the survey said.

Fewer respondents expect President Donald Trump to win a second term, at 42%; but 90% believe that the U.S. would become more unilateralist or isolationist — and more inward looking — in that case. That suggests it could be harder for sovereign wealth funds to invest in the U.S., the report said.

The report said sovereign wealth funds see a "bipolar tussle" between the U.S. and China, with an expectation that the relationship and tensions between the two economic powerhouses will intensify.

A majority of respondents (83%) believe that the U.K. will become more aligned with the U.S. over the coming year, although the position of the European Union is less clear. Respondents were split on whether the EU will align with the U.S. or hedge its relationship between the two countries.

In terms of recovery from the impacts of the COVID-19 pandemic, the majority (58.3%) of respondents expect a U-shaped recovery, followed by W-shaped (29.2%) and V-shaped (8.3%). The remaining 4.2% of respondents expect an L-shaped recovery.

By region, 61% of respondents expect developed markets to return to pre-COVID-19 growth.

Across major markets, 60% of sovereign wealth funds said China is best placed to recover. About a quarter (26%) of respondents believe emerging markets are best placed to return to pre-pandemic growth, with 57% viewing India as most likely to recover. Brazil and Russia, however, are viewed as unable to keep up with their previous growth trends.

Frontier markets were viewed as being best-placed to recover by 13% of respondents.

In terms of investment destination, dollar-denominated equities will be the most attractive opportunity, according to 71% of respondents, followed by renminbi equities at 17% and euro equities at 8%. The remaining 4% of respondents did not know.

The report noted that the apparent pessimism among respondents should be put into context in terms of "recency bias" — with respondents extrapolating current and recent events into their vision of the future; and that the survey was designed to gauge short- to medium-term views and not long-term trends.

The report, The rise of a bipolar world: Sovereign wealth fund views on the global macro outlook, is available for download from the IFSWF's website.