A significant re-evaluation of investment portfolios, driven by unprecedented geopolitical shifts, is seeing sovereign wealth funds and central banks managing a combined $29 trillion in assets pivot towards energy assets while expressing growing concerns about the US dollar, according to a survey released Monday. The survey of 90 sovereign wealth funds and 54 central banks reveals that against a backdrop of trade tariffs, shipping lane closures, and conflicts in Ukraine and the Middle East, these institutions are increasingly focused on diversification and building portfolios that can "endure and remain robust" in the face of shocks.
Approximately 80% of respondents identified energy security and energy transition infrastructure as the most credible investments for bolstering portfolio resilience. By 2026, infrastructure assets are expected to account for 9% of sovereign wealth fund holdings. The report from the global investment manager notes that the race to build energy-intensive AI infrastructure is further enhancing the appeal of these assets.
Invesco's Head of Research, Benjamin Jones, stated, "In a world of inflation shocks, geopolitical fragmentation, and more concentrated markets, investors are rethinking old assumptions on diversification and redesigning portfolios to withstand a broader set of potential outcomes." He added, "Resilience is becoming a requirement, not a 'nice to have'." The phenomenon of positive stock-bond correlation in recent years has also diminished reliance on bonds for diversification, shifting focus towards liquidity and physical assets.
Concerns Over the Dollar, Debt, and Risk
Worries about the US dollar are described as "broad and deepening." A significant 61% of surveyed central banks indicated that US debt levels are negatively impacting the dollar's long-term status as a reserve asset, a sharp increase from 20% in a previous 2024 survey. While factors such as tensions in the Middle East have contributed to a 3% rise in the dollar's value this year, analysts suggest that US policy uncertainty and high debt imply potential long-term weakness for the currency.
The absence of a credible alternative to the dollar means any shift away from it is likely to be gradual. However, 29% of respondents in the Invesco survey believe the dollar's reserve currency status will weaken within five years, up from 12% in 2022.
Invesco also noted that some institutions are reviewing their reliance on US-based custodians, counterparties, and clearing infrastructure due to geopolitical tensions. One European central bank reported it had already replaced its US custodian, while a Latin American central bank stated it is establishing new non-US custodian relationships to prepare for a "worst-case scenario." A central bank respondent cautioned, however, that such moves are not without risk, noting, "The act itself could be interpreted by the US as hostile."
In a related diversification trend, one-third of survey respondents stated their intention to increase gold holdings.
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