Equities back in favor for sovereign investors in third quarter

LONDON (Reuters) – Sovereign wealth funds regained their appetite for equities in the third quarter, piling into passively managed stocks in the United States and equities in mainland China and elsewhere, according to eVestment data.

Passively managed S&P 500 funds — those that buy a basket of S&P 500 stocks and hold them rather than trading day to day — took in $1.09 billion from sovereign investors during the period, the first net inflow since the fourth quarter of 2016, after significant outflows in recent years.

In another sign of renewed interest in equities, sovereign investor inflows to global enhanced equity funds — which are actively managed — reached $1.05 billion, their largest since the fourth quarter of 2017.

“This is an indication that SWFs (sovereign wealth funds) have slowly seen their sentiment change in the near term to global equities, both to active and passive strategies, as they had been removing assets at an elevated rate in the three quarters prior to Q2 2019,” said Peter Laurelli, global head of research at eVestment, which collates data from firms managing money on behalf of institutional investors.

U.S. stocks have reached record highs as hopes have risen of a breakthrough in the U.S.-China trade discussions. At the same time, fears of a U.S. recession have eased, helping support forecasts for corporate earnings.

J.P. Morgan Asset Management this week raised its outlook on global stocks, while UBS moved its overall position on equities to neutral.

Allocations by sovereign investors to onshore Chinese stocks, or A shares, rose to a record level, with inflows of $1.12 billion during the quarter.

“It may be the case that while SWF’s exposure to China will increase as a result of their exposure to passive global EM equity strategies, a segment to which they’ve allocated nearly $7 billion since the beginning of 2018, there is additional interest in supplementing that long-only index-based exposure to China with alternative approaches,” Laurelli said.

China is stepping up opening its capital markets and foreign holdings of Chinese stocks rose to a record high at the end of September.

Global index provider MSCI said this month A shares will rise to a weight of 4.1% in the MSCI Emerging Markets Index from 2.55% currently, as part of its final step in the weight increase of Chinese shares in the emerging-markets benchmark.