The USA most attractive market for sovereign investment

Flatiron Building, New York, United States

The USA has overtaken the UK to become the most attractive market in the world for sovereign investment.

Sovereign investors, which include sovereign investment funds created or controlled by a country’s government, have previously preferred the United Kingdom out of all the development western markets, but now, they are turning to America.

Invesco’s Invesco Global Sovereign Asset Management Study in 2014 saw the country score 8.3 out of 10 in terms of attractiveness. Its latest report for 2016 has seen that rise to 8.7 out of 10, ahead of the UK’s 7.7. Western sovereign investors also remain bullish on future opportunities in the United States, and in US infrastructure, in particular.

The fourth annual study is based on face-to-face surveys with 77 individual sovereign investors and reserve managers across the globe, representing two-thirds of sovereign assets and 25 per cent of foreign reserves – totalling $8.96 trillion of assets.

The climbing positive sentiment towards the US is attributed to the perception that the country is “increasingly open” to their investments. Many also feel it is now easier and more attractive to invest in the US, in large part linked to more investment friendly policies, such as the introduced exemption in 2016 for qualified foreign pension funds from the Foreign Investment in Real Property Tax Act on real estate purchases.

This year’s study reveals that despite continued market volatility and the sustained low oil price, US sovereign investor confidence is stable and they continue to pursue long-term investment goals through strategic asset allocation. Overall US sovereign investor confidence has been stable since 2013 – with Invesco’s Sovereign Confidence Index highlighting that overall confidence has increased from 7.2 in 2014 to 7.8 in 2016.

However, new allocations to frontier markets are also on the rise, with western allocations to Africa increasing from 0.5 per cent in 2014 to 1.1 per cent in 2015. Manufacturing capability, political stability, and the quality of infrastructure are cited as key factors for this change, and via a range of products, including conventional equity and fixed income products, and direct investments into alternatives, such as real estate.

Conversely, the BRIC markets – Brazil, Russia, and China – have all lost their attractiveness to US sovereign investors amid weaker performance, with only India becoming increasingly attractive over the last two years. In comparison to the last few years, sovereign investors globally are now less willing to overlook political and regulatory concerns in these regions to hit target allocations. Sovereign investors note a struggle with commodity prices and falling stock markets for large export markets like Brazil and Russia, while the shrinking labour force in China is driving up manufacturing costs and squeezing private sector margins.

Alex Millar, Head of EMEA sovereigns and Middle East and Africa institutional sales at Invesco, comments: “Despite being long-term strategic investors, sovereign investors are quick to adjust to perceptions of market attractiveness, responding to latest market data or regulatory change. Market performance and public policy also factor into their longer term strategic asset allocation choices – especially geographically. The ability for governments to attract sovereign investment via policy decisions is a key finding and presents an opportunity for governments globally to attract significant long term capital to support economic growth.”

Comments

comments