India among prime sovereign investment destinations, says study

India is among the emerging economies with solid demographics, political stability, and proactive regulations, that have emerged as prime investment destinations for central banks and sovereign funds, Invesco said in a report released on Monday.

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

“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,” the report quoted a development sovereign based in the Middle East as saying.

The global investment management firm surveyed 85 sovereign wealth funds and 57 central banks that together manage about $21 trillion in assets for the study.

India is also among countries, including Mexico and Brazil, that are benefiting from increased foreign corporate investment aimed at both domestic and international demand through “friend-shoring” and “near-shoring”, the study said, adding that this was seen as helping fund current account deficits as well as support currencies and domestic assets including debt.

“Friend-shoring” and “near-shoring” are emerging investment strategies that global corporate investors are increasingly adopting; the former involves investing in countries with favorable business environments and political stability, like India, while the latter refers to directing investments to countries geographically closer to the markets, optimizing supply chain efficiency and reducing costs.

Demand for gold spirals

Meanwhile, as yields rise, global sovereign investors are planning to step up investments in bonds, the report said. Western sanctions on Russian assets have also sparked an increase in their demand for gold.

The study cited a central bank based in the West as saying that it is looking to increase its exposure to emerging market debt, especially real estate and infrastructure.

Meanwhile, amid concerns of surging inflation, gold has emerged as a preferred hedge, with many central banks indicating a step-up in gold purchases over the next three years, the survey showed.

Moreover, the bond market, which has been battered by the anticipation of further monetary policy tightening, is likely to receive support from sovereign investors. “Some investors reported buying as much fixed income as possible within existing asset allocation limits, and were considering revising their framework to accommodate the new interest-rate environment,” the Atlanta-based fund manager said in the report.

Sovereign funds posted average losses of 3.5% in the year to December 2022, marking their first loss since Invesco began the survey in 2013.