Reserves managers face up to tough investment environment
KAMPALA- Most central bank reserves managers are resigned to a period of higher inflation and lower returns, according to a report published today by the global think tank- Official Monetary and Financial Institutions Forum [OMFIF].
More than 75 percent of the central banks surveyed for the 2022 edition of Global Public Investor believe inflation will be sustainably higher or more volatile for a prolonged period. Just 20 percent of reserves managers think inflation will be transitory.
At the same time, central banks believe the new macroeconomic environment will cause their portfolios to suffer. More than 70 percent say that they have accepted lower real returns or that their decision-making has not been affected by rising inflation. Faced with volatile and falling markets, capital preservation and liquidity have become more vital than ever for reserves managers, with more than 90% saying these are now their most important investment objectives.
Conducted shortly after Russia’s invasion of Ukraine, the survey found that inflation is the number one concern of reserves managers, closely followed by geopolitics. Central banks are becoming more cautious about deploying their reserves, with just one-third prepared to use more than 30 percent of reserves in the event of a foreign exchange crisis, compared to almost 60 percent in 2021. This comes against a backdrop of global central bank reserves rising to a new record level of $16.2tn, representing growth of more than 20 percent since 2019.
‘Our research is the first of its kind to reveal how reserves managers – one of the world’s most influential investor groups – are reacting to a generational shift in the investment environment,’ said Clive Horwood, deputy CEO and managing editor of OMFIF. ‘We have moved incredibly quickly from a lower-for-longer rates environment to a higher-for-longer inflation outlook. These will be very challenging.”
In Africa fewer than 5 percent of reserves managers intend to increase their exposure to the region and African assets currently make up only 2.5 percent of global portfolios. African reserves managers use external managers for more than 16 percent of their assets under management, the highest for any region apart from Latin America.
More than two-thirds of respondents do not implement Environmental, Social and Governance [ESG] criteria in their reserves management practices, with 50 percent attributing the relative complexity of sustainable assets – almost double the 26 percent global average – as one of the main obstacles to integrating ESG criteria into investment policies. The role of the renminbi has increased as economic and financial ties with China deepen.
As a proportion of total portfolios, a 5.2 percent allocation represents a greater share than even Asia Pacific, with 42 percent of central banks planning to increase this exposure in the next 12- 24 months. The dollar is becoming less important to African reserves managers, with its representation in African portfolios falling to 61 percent from 69 percent in 2021 – the only region to reduce dollar holdings.
“Central banks have traditionally been risk-averse investors, putting capital preservation and liquidity at the heart of their approach. Upheavals in the macroeconomic environment have only served to reinforce this. More than 90 percent of reserves managers cite capital preservation and ensuring liquidity as their top-two investment objectives. In our 2021 survey, capital preservation was a top-three objective for 75 percent of respondents. Capital preservation is also the most important factor in diversifying reserves, cited by 44 percent. Less than 30 percent of respondents in 2020 ranked capital preservation as a top-three factor in diversification. The question in the months and years to come for many reserves managers will be whether capital preservation actually equates to minimising capital losses.”
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