Global Sovereign Wealth Funds To Abandon Stocks Amid Trade War Tumult

As the hopes and dreams of the end of the trade war - that delusionally sustained around 800 Dow points of exuberance in the last few days - are dashed at the altar of Trump tariff reality, it appears the world's sovereign wealth funds are well ahead of the looming storm.

And away from 3 or 4 mega tech stocks, the broad US equity market is not 'breaking out' as many hope...

In an annual report by asset manager Invesco, over a third of sovereign investors plan to cut their equity exposure over the next three years after a strong run in 2017, citing trade wars, geopolitics and high valuations as headwinds to performance.

Reuters reports that the report, which is based on interviews with 126 sovereign investors and central bank reserve managers with $17 trillion in assets, found equities had overtaken bonds to become the biggest asset class in portfolios, averaging 33 percent. This is up from 29 percent in 2017.

Nearly half of sovereign investors are now incrementally or materially overweight equities, but while 40 percent said they were happy with the status quo, 35 percent plan to reduce their equity exposure over the medium term, Invesco noted.

Alex Millar, head of EMEA sovereigns at Invesco, said survey participants had been “pretty far-sighted” in highlighting the risk of a trade war early in the year.

“Equities had a good run last year, but this hasn’t caused investors to change their long-term expectations – they think returns going forward will be tough,” said Millar.

Maybe the sovereign wealth funds are part of the SMART money that is exodus-ing US equities at an unprecedented pace...

Ironically, as SWFs abandon stocks, Central Banks are venturing deeper into alternative assets and ramping up their risk-taking.

Government-backed agencies have traditionally focused on preserving capital, but, as Bloomberg reports, with some government-bond yields having slumped below zero, central banks are increasing their bets (of their trillions of dollars of foreign reserves) on higher-risk mortgage-backed securities, corporate debt, equities and emerging-market debt.

“Central bank reserve managers typically wake up in the morning figuring out how to avoid losing money,” said Alex Millar, head of EMEA sovereign and institutional sales at Invesco Ltd. But now, "the requirement for return is creeping up.”

“They’ve had to look for asset classes outside of their traditional comfort zone,” Millar said. “They’re beefing up their risk-management capabilities, their understanding of asset classes, having to educate their board on why they need to do that.”

Central banks have earmarked an average of about 14 percent of their assets for non-traditional investments, the survey showed.