Sovereign investors across the world are optimistic about the outlook for 2024 despite the potential for major global political shocks and uncertainty around the long-term path for interest rates, according to Invesco.

In a survey of a small group of sovereign investors with total assets under management of $500 billion, Invesco found that anticipated interest rates shaped the investment strategies among sovereign wealth funds and central banks.

The survey also found these institutions increasingly drawn to opportunities in private credit and artificial intelligence.

Josette Rizk, Head of Middle East and Africa, Invesco said: “Our survey underscores the resilience of sovereign investors in the face of evolving market dynamics. Their optimism is founded not just on the potential for short-term rate cuts and a more attractive longer-term monetary policy environment, but also on their ability to capitalise on growing asset classes, such as private credit, and emerging technologies, like AI."

While the long-term path for interest rates remains unclear, some sovereigns believe the neutral long-term rate may be lower than they have previously anticipated. “In the next decade, interest rates may be half a percentage point higher than the previous decade. However, I don’t see as much of a difference as the market is projecting, which creates opportunities,” said one central bank in Europe.

Though sovereigns are positive about the prospect of falling rates, the higher rates of recent times have dampened returns due to mark-to-market write-downs. Higher available yields have also driven sovereign investors to fixed income and credit in particular, which is often viewed as attractive relative to equities.

The survey also found that funds considered private credit attractive as they offer immediate cash flow generation, strong yields, and diversification benefits.

Despite prior apprehensions concerning rising rates, the sector has demonstrated remarkable growth and resilience. “A lot of people expected private credit to show some weakness; instead, the sector is growing like crazy,” noted a representative from a North American sovereign wealth fund.

Factors such as liquidity management and US tax exemptions play a significant role in shaping sovereign’ private credit investment decisions, and they also anticipate particular growth in emerging markets focused strategies.

Focus on AI

Sovereign investors expect the role of AI in investment strategies to become increasingly pronounced, offering insights into complex relationships in large data sets and enhancing alternative information analysis through natural language processing, the report said.

“We have started to apply AI to our process and in the next 10 years, we are likely to see dramatic changes in how investment decisions are made,” said one Asian sovereign wealth fund.

Despite this optimism, sovereigns continue to wrestle with regulatory uncertainty, as well as questions around transparency and the ‘black box’ aspect of AI models.

In terms of investing, sovereign funds are exploring AI opportunities across sectors including healthcare, finance, transportation, manufacturing, and agriculture, prioritising industries where they possess expertise or leverage.

(Writing by Brinda Darasha; editing by Seban Scaria)