Markets and Economy US stocks bear the brunt of global economic uncertainty
The global economic outlook is uncertain, yet European, UK, Chinese, and Japanese stocks all rose last week while US stocks fell.
April 22, 2025
Private credit
Taking the pulse of sovereign investors: Geopolitics, China, and fixed income
Key takeaways
Geopolitics
Sovereign investors continue to favor US markets, but the Trump presidency has placed a growing importance on geopolitical considerations.
China
The outlook for investing in China is viewed as complex, driven by strategic factors and technology developments, forcing long-term investors to look beyond the headlines.
Fixed income
Within fixed income, private credit and infrastructure debt are taking center stage as institutions seek yield premium for patient capital.
The world is changing, and sovereign investors see both risks and opportunities from these shifts — from emerging tensions over trade and tariffs, to China’s advancements in strategic sectors, to the changing role of fixed income in portfolios. Those are among the key insights from our survey of a group of sovereign investors with total assets under management of US$1 trillion.
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Navigating uncertainty in trade and geopolitics
Sovereign investors continue to favor US markets due to the country’s exceptional growth story — especially compared to Europe’s structural headwinds — but the Trump presidency has placed a growing importance on geopolitical considerations.
US vs. Europe growth divergence
Manufacturing weakness has been seen as particularly acute in Europe. Meanwhile, the Trump administration's business-friendly policies and reduced red tape are seen as attractive to foreign investors. Monetary policy divergence seen as likely to persist, creating opportunities in rate-sensitive assets.
“It is a challenge in strategic asset allocation, especially in equities. How long is the US run going to last? Are we finally going to see an uptick in Europe?” — Central Bank, Europe
Tariffs and trade policy
Trade tensions are expanding beyond US-China to include the EU, Mexico, and Canada — and there is significant concern over the impact of tariffs on inflation and therefore interest rates. Trump’s policy shifts are also leading to uncertainty regarding the OECD global minimum tax. Sovereign investors anticipate higher levels of volatility but also expect to benefit as long-term investors that can ride out short-term volatility and seize on dislocation opportunities.
“Increased trade protectionism is likely to sustain higher inflation in developed markets. We believe deglobalization poses risks to our investment returns.” — Sovereign Wealth Fund, Asia
Oil price dynamics
There is a renewed focus on US oil production capacity. The potential resolution of the Russian-Ukraine conflict could lead to increased global supply and is a significant ‘known unknown’ for the Trump presidency. Higher production could pressure economies that are reliant on high oil prices.
“We don't benefit from volatility; it can create opportunities but also introduces risks we prefer to avoid.” —Sovereign Wealth Fund, Middle East
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China: Balancing economic challenges with opportunities
The outlook for investing in China is viewed as complex, driven by strategic factors and technology developments, forcing long-term investors to look beyond the headlines.
China's economic transition challenges
Property sector issues are seen as signaling deeper structural challenges in the country’s transition from investment-led growth, and private sector confidence is seen as weak despite stimulus measures. Political/regulatory risks are creating allocation hesitancy, with many institutions maintaining limited strategic presence while monitoring reforms. However, some investors are reporting increased confidence in the long-term direction.
“Our solution (in China) is maintaining minimal strategic exposure while watching for reforms and buying opportunities” — Sovereign Wealth Fund, North America
Pockets of positives
China’s leading position in strategic sectors such as electric vehicles, batteries, and artificial intelligence create unavoidable investment considerations. Meanwhile sovereign investors are paying close attention to China’s growing AI capabilities which could create a potential challenge to US tech dominance. Manufacturing competitiveness is seen as persisting despite higher costs and geopolitical tensions. Long-term institutional investors are reassessing the "China discount" as valuations become attractive, and some investors are using current challenges to build long-term strategic positions, especially in private markets.
"China's advancements in key sectors like EVs and batteries present competitive challenges that can't be ignored" — Sovereign Wealth Fund, Middle East
Yuan internationalization
Regional settlement mechanisms are evolving and leading to growing use of the yuan, but impact on central bank reserves remains limited. Central banks remain hesitant due to convertibility and political alliance concerns, with increased Russia ties boosting yuan settlements but creating political complications. Most institutions are maintaining USD dominance in portfolios as China’s financial market depth and transparency develop to meet major reserve currency requirements.
"We do not see a strong challenger to the dollar. At the moment, euro and sterling are not doing very well. Japan is in moderate position and China still has to fix the real estate issues." — Central Bank, Asia
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Fixed income: From safe haven to alpha engine
Private credit and infrastructure debt are taking center stage as institutions seek yield premium for patient capital.
Strategic allocation shifts
Increases in fixed income allocations are being driven by both yield opportunities and private credit expansion. Private credit is evolving from a tactical play to a strategic portfolio driver, with private credit filling the void left by bank retrenchment from certain markets. Infrastructure debt is emerging as a key focus area, especially for liability-driven investors, providing both yield and inflation protection characteristics. Debt relating to AI-related data center investments is seen as a major opportunity.
"Previously fixed income had a specific role - safety and hedging. Now we're completely rethinking this. In areas like private credit and infrastructure debt, it's becoming a major return driver.” — Sovereign Wealth Fund, North America
Private credit market dynamics
Institutions are looking to better leverage reliable long-term capital advantage in private debt markets. Funds are building specialized lending teams to source and structure private deals directly, reducing reliance on external managers. Private credit is expected to keep growing, but concerns remain that private credit portfolios can be opaque with limited transparency.
"The key challenge isn't just finding deals - it's building teams that can originate and structure them directly. We're evolving from pure investors to becoming lenders" — Sovereign Wealth Fund, North America
Fixed income portfolio implementation
The traditional hedging role of fixed income is seen as less reliable, forcing funds to find new portfolio protection strategies such as derivatives. As private market allocations increase, liquidity management is also becoming more important and sophisticated. Sovereign wealth funds are expanding beyond their traditional investor roles and becoming fund managers in private debt markets. They're aggressively recruiting entire teams from established private debt firms by offering profit-sharing arrangements - a significant departure from sovereign wealth funds' typical compensation structures.
"The old playbook no longer works. Interest rates no longer drive bond markets in predictable ways, especially in corporate bonds. We need new strategies.” — Sovereign Wealth Fund, North America
The data contained within this article are from a survey conducted between January – March 2025 as a precursor to the Invesco Global Sovereign Asset Management Study 2025, which will be published in the summer of 2025. The research was completed using a global audience of 140 sovereign wealth funds and central banks representatives. Together, these organizations oversee approximately $22 trillion in assets under management.
Survey participants experience may not be representative of others, nor does it guarantee the future performance or success of any product. The opinions expressed are those of the sovereign wealth funds surveyed and are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. There may be material differences in the investment goals, liquidity needs, and investment horizons of individual and institutional investors.
Invesco is not affiliated with NMG Consulting. NMG Consulting specializes in research, analytics, and insights for the Investment, Asset Management, Wealth Management, Insurance and Reinsurance Markets.
Invesco sponsored this survey. NMG Consulting offered participants an honorarium for their participation.
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