State Stabilization Funds Most Troubled by Geopolitics

Geopolitical and trade conflicts are causing more headaches for state stabilization funds and central banks today than inflation, a study by the American investment firm Invesco revealed on Monday.

Inflation has recently eased, while armed and trade conflicts are escalating, Invesco interprets, highlighting the fact that nearly half of the world’s population will go to the polls this year.

– This year is, of course, an election year. Geopolitics has surpassed inflation in both short-term and long-term forecasts – concludes Rod Ringrow, head of the institutional department at Invesco.

Approximately 83 percent of respondents consider geopolitical tensions the main risk in the coming year, while 73 percent cite inflation.

Among the risks over the next 10 years, as many as 86 percent of respondents highlighted geopolitical fragmentation and protectionism, while climate change ranked second.

– Climate is mainstream today – Ringrow concluded, adding that state funds and central banks are testing investments in the ‘green’ sector to assess the impact of such investment policies.

Dominance of the Dollar

Invesco highlighted among the key findings of this year’s study the efforts of central banks to increase reserves to mitigate risks and ensure maneuvering space for intervention in case of market disruptions.

Slightly more than half of the respondents, 53 percent, signaled that they plan to increase reserves in the next two years, partly due to pronounced uncertainty in the global economic environment, especially regarding the elections.

– Everything is currently very uncertain, and that is a motivation for increasing reserves – quotes Invesco an unnamed representative of a Western central bank.

Among the motivations, respondents also cite higher yields as central banks around the world have raised interest rates to curb inflation. Almost two-thirds of respondents also note that the increase in U.S. public debt negatively affects the global role of the dollar.

Slightly less than one-fifth of respondents, 18 percent, believe that the dominance of the dollar as the world’s reserve currency will weaken in the next five years. In last year’s survey, 11 percent held this opinion.

Despite concerns about the fiscal position of the U.S. and the potential negative impact of debt-related risks, most central banks do not fear for the short-term prospects of the greenback.

The Best We Have

Seventeen percent believe that the dollar could face competition in more than 20 years, while 37 percent estimate that this will not happen in the foreseeable future.

– The dominant position of the dollar seems secure for now, but the research reveals an increasing discomfort among central banks regarding the risks posed by excessive reliance on the greenback. A significant source of concern has emerged, primarily, the potential weaponization of the dollar, which 45 percent of respondents consider a key risk for the continued dominance of the dollar – the study’s authors determined, adding that such an assessment is particularly pronounced among central banks in Asia and emerging markets.

Such a stance would be significantly reinforced by the confiscation of currently frozen Russian assets and their transfer to Ukraine for reconstruction purposes, as it could set a precedent, Invesco notes.

– The possibility of weaponizing the dollar genuinely concerns us. We have seen that the U.S. (at times) has used financial dominance to achieve geopolitical goals, and that is why we are more cautious about excessive reliance on the dollar in reserves – quotes Invesco an unnamed representative of a central bank in the Middle East.

The research results lead to the conclusion that, despite these fears, the dollar will play a dominant role in both the short-term and medium-term perspectives.

– The dollar may not be a comfortable refuge, but it is still the best we have – said a representative of a Western central bank.

The Gold ‘Rush’

In an environment of continuous uncertainty and challenges in seeking sustainable alternatives to the dollar, central banks consider gold an increasingly attractive option in expanding their reserves and protecting against risks.

Fifty-six percent believe that gold is more attractive today due to the risks of weaponizing central bank reserves, while 48 percent highlighted the rise in U.S. public debt.

More than a third of central banks have recently increased their gold holdings in reserves, Invesco states.

– Gold is a refuge that is not subject to fluctuations and an asset that instills confidence. It protects against the weaponization of currencies – explained a representative of an Asian central bank.

Thus, 70 percent of respondents believe that gold protects against inflation, and 60 percent see in the precious metal a safeguard against geopolitical upheavals, Invesco notes.