Central banks repatriating gold; India emerges as prime investment destination for sovereign investors: Survey

The number of countries that are repatriating gold reserves are rising as central banks looking to combat yield volatility and inflation risk see gold as a safe-haven asset, shows a survey,

According to Invesco Global Sovereign Asset Management Study published on Monday, more than 85% of the 85 sovereign wealth funds and 57 central banks that took part in the annual survey believe that inflation will now be higher in the coming decade than in the last.

A central bank in the West noted, “I think that inflation will not return to where it was in the last five years. The main question mark is how sticky it is. In the past it has been surprising how persistent inflation can be.”

As per the survey, sovereign money managers are ‘fundamentally’ rethinking their strategies on the belief that higher inflation and geopolitical tensions will prevail.

Gold and emerging market bonds are seen as good bets in that environment, but last year's freezing of almost half of Russia's $640 billion of gold and forex reserves by the West in response to the invasion of Ukraine also appears to have triggered a shift, Reuters reported.

The survey showed a "substantial share" of central banks were concerned by the precedent that had been set. Almost 60% of respondents said it had made gold more attractive, while 68% were keeping reserves at home compared to 50% in 2020.

“We did have it (gold) held in London... but now we've transferred it back to own country to hold as a safe haven asset and to keep it safe,” quoted one central bank.

The study revealed a broadened appetite for Emerging Markets among sovereign investors. Respondents sought new sources of diversification and higher returns across emerging Asia, Latin America and Africa

The respondents commended Emerging Markets’ resilience amidst rapidly increasing interest rates – a contrast to previous crises such as the 2013 taper tantrum – indicating institutional strength has steadily improved over the last decade. 

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Meanwhile, the survey shows India exemplifies the attributes sought by sovereign investors.

Viewed increasingly positively for its improved business and political stability, favourable demographics, regulatory initiatives, and a friendly environment for sovereign investors, India has now overtaken China as the most attractive Emerging Market for investing in Emerging Market debt, the survey said.

A development sovereign based in the Middle East noted, “We don’t have enough exposure to India or China. However, India is a better story now in terms of business and political stability. Demographics are growing fast, and they also have interesting companies, good regulation initiatives, and a very friendly environment for sovereign investors.”

India is among a number of countries, including Mexico and Brazil, that are benefitting from increased foreign corporate investment aimed at both domestic and international demand through “friend-shoring” and “near-shoring”. 

This was seen as helping fund current account deficits as well as support currencies and domestic assets including debt. Expectations for peaking inflation and a completion of the Emerging Markets tightening cycle was also playing a role in this trend, the study said.

Moreover, geopolitical concerns, combined with opportunities in emerging markets, are also encouraging some central banks to diversify away from the dollar.

A growing 7% believe rising US debt is also a negative for the greenback, although most still see no alternative to it as the world's reserve currency. Those that see China's yuan as a potential contender fell to 18%, from 29% last year.

Nearly 80% of the 142 institutions surveyed see geopolitical tensions as the biggest risk over the next decade, while 83% cited inflation as a concern over the next 12 months, Reuters reported.

Meanwhile, infrastructure is now seen as the most attractive asset class, particularly those projects involving renewable energy generation.

(With inputs from Reuters)