Geopolitics replaces inflation as the top worry for central banks and sovereign wealth funds

In a year when more than 4 billion people are eligible to vote in elections globally, geopolitical concerns have emerged as the primary worry for central banks and sovereign wealth funds.

An increasingly polarized and fragmented political landscape has overtaken inflation as the top risk factor for these institutions, find a new a survey by asset management company Invesco. The trends outlined in the Global Sovereign Asset Management Study 2024, reflect an ever more complex and uncertain world for central banks and sovereign wealth funds to navigate.

Geopolitical tensions are seen as the main risk to global economic growth in the coming year for 83% of respondents, surpassing concerns about high inflation and monetary tightening (73%). Looking ahead to the next decade, 86% of participants identify rising geopolitical fragmentation and protectionism as the most significant long-term threat.

The survey says ongoing conflicts in Ukraine and the Middle East, tensions between major powers including the US and China and the uncertainty surrounding the outcome of so many elections in 2024 are all driving this increased focus on geopolitical risks.

In response to these challenges, central banks are bolstering and diversifying their reserves. Over half (53%) plan to increase the size of their reserves in the next two years, while 52% intend to further diversify their holdings. This strategy aims to create a buffer against potential shocks and ensure sufficient resources to intervene in case of market disruptions.

Invesco’s study also highlights a growing shift towards gold and emerging market assets as means of diversification for central banks and sovereign wealth funds. The potential weaponization of central bank reserves has made gold more attractive to 56% of respondents, while allocations to emerging markets are projected to increase significantly over the next five years.

As sovereign investors adapt to this shifting landscape, their strategies reflect a delicate balance between managing immediate geopolitical risks and positioning themselves for long-term stability and growth in an increasingly multipolar world.

The social and economic instabilities that flow from geopolitical tensions are likely to persist into the future.

The World Economic Forum’s Global Risks Report 2024, highlighted that two-thirds of respondents to this year’s Global Risks Perception Survey believed that “a multipolar order will dominate in the next 10 years, as middle and great powers set and enforce – but also contest – current rules and norms.”

The survey found that 54% of respondents expect a degree of instability and a moderate risk of global catastrophes over the next two years, An additional 30% foresee even more tumultuous conditions in the same period. Looking further ahead to the 10-year horizon, the outlook becomes notably more pessimistic, with almost two-thirds of those surveyed anticipating either stormy or turbulent circumstances.

As well as highlighting the geopolitical tensions and polarized nature of global political discourse, the Global Risks Report sets out a range of strategies, from nation-state to individual, for returning the world to a more stable order.

Cross border collaboration at scale will be crucial where the alternative could lead to armed conflict between nations or other threats to human security and prosperity. Additionally, localized investment and regulation can be used to mitigate predictable risks, with both public and private sectors playing crucial roles, the report says.

When faced with challenges on a global scale, individual actions may seem insignificant. But the report points out that together, small actions can significantly reduce global risks.

The coming decade will bring unprecedented change, testing our adaptability. Multiple potential futures lie ahead, and our current efforts to address global risks can shape a more positive outcome.