Fear of inflation
Financial institutions expect that rising inflation and geopolitical tensions will continue for some time and have begun to alter their strategies appropriately. More than 85 percent of the 85 sovereign wealth funds and 57 central banks polled by Invesco anticipate that inflation would be greater in the coming decade than it was in the previous one. Emerging market bonds and gold are performing well in this scenario.
However, the decision by Western countries to freeze hundreds of billions of dollars of gold and foreign exchange assets in Russia has increased interest in repatriating gold.
According to the study, a large proportion of central banks are concerned about this precedent. As many as 68 percent stated they would rather retain their reserves at home. In 2020, almost half of the banks polled chose to keep their gold reserves in their own nation.
Diversifying portfolios away from the US dollar
At the same time, geopolitical worries, as well as burgeoning prospects in developing economies, are driving some central banks’ desire to diversify their portfolios away from the US currency. Although most people still believe the US currency is the world’s reserve currency, there has been an uptick in those who feel growing US debt is bad for the dollar. The proportion of those who consider the Chinese yuan as a potential challenger to the dollar has dropped from 29 percent last year to 18 percent this year.
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According to the report, roughly 80 percent of the 142 institutions polled saw geopolitical tensions as the greatest danger for the next decade. Inflation was cited as the top concern for the next 12 months by as many as 83 percent of respondents.
