Following a year of embracing risk and doubling down on equities, institutional investors in 2025 are beginning to rein in their aggressiveness amid global market uncertainty, according to a report released by the International Forum of Sovereign Wealth Funds.
The report, based on data provided by State Street, stated that although capital flows across risk assets showed “risk-seeking behavior throughout 2024,” this has been “pared back” since the start of this year.
“In line with a rapidly changing geopolitical backdrop, investors are showing signs of caution in their portfolios,” the report stated. “Global protectionism, the impact of evolving trade tariffs, and ongoing developments with respect to Russia’s invasion of Ukraine and conflict in the Middle East continue to create uncertainty for investors.”
Nevertheless, according to State Street data, institutional investors still have an appetite for equities, with allocations remaining near their decade-long peak. But the report also stated that long-term investors “are expressing some rotation in their portfolios within asset classes,” such as a tilt toward European and emerging markets equities instead of U.S. equities. They are also exiting some of their large positions in information technology and consumer discretionary stocks. And while their geographical allocations were left mainly untouched, the report stated that the institutional portfolios leaned slightly toward allocating to global emerging markets and China.
The outliers among institutional investors are sovereign wealth funds, according to the report, which found they “have been less keen on public equities than their peers.” Approximately half of the sovereign wealth funds surveyed for the report said they had left their allocation unchanged, while one-third said they decreased their allocation to public stocks in 2024. Two-thirds reported increasing their private equity allocation in 2024, and half said they increased allocations to other alternatives, such as real estate, infrastructure, hedge funds and commodities.
Regarding fixed-income investments, the report found that institutional investors are showing a preference for sovereign bonds in Italy, Germany, the U.K., Norway and Australia, with less interest in sovereign debt from the U.S., Canada and some other European countries.
In the currency markets, the survey data show signs that global institutional investors are unwinding their overweight positions in the U.S. dollar and Swiss franc, with a preference for Australian and New Zealand dollars, according to the report.
When asked which key factors were behind the their portfolio adjustment decisions, interest-rate changes and inflation were the top two reasons, cited by 60% and 59% of respondents, respectively. These were followed by public market valuations (55%), growth changes/recession (50%) and geopolitical risk (44%). Of the options presented, climate change and regulatory changes had the least impact on the institutional investors’ decisions at 18% and 16%, respectively.
Tags: IFSWF, International Forum of Sovereign Wealth Funds, sovereign wealth funds, State Street