Geopolitical tensions have overtaken inflation as the top concern for sovereign investors, according to a study. This shift is driving investors to diversify their portfolios, looking towards emerging markets and “safe haven” assets.

The study by asset manager Invesco has shown that 83% of respondents now see geopolitical tensions as a major risk to global growth, up from 72% last year. Sovereign wealth funds (SWFs) are increasingly eyeing emerging markets, with 67% expecting these markets to perform as well as or better than developed ones over the next three years.

This year, SWFs saw an average return of 7.2%, a notable recovery from last year’s -3.5%, according to the study gathering insights from 140 chief investment officers and senior portfolio strategists at 83 SWFs and 57 central banks. It was the first time since the survey began in 2013 that SWFs had faced negative returns.

The ongoing strategic competition between the US and China is opening up opportunities for emerging markets. Near-shoring, where major economies diversify their supply chains, are set to benefit these regions. Asia (excluding China), Latin America, and particularly India, with its large domestic market and growing middle class, are seen as prime investment destinations.

Emerging market debt is also drawing interest from SWFs, offering attractive returns compared to developed market bonds. India stands out, with 88% of respondents looking to increase their exposure to Indian debt, reflecting confidence in the country’s economic prospects.

Amid expectations of prolonged higher inflation and interest rates, listed equities and private credit have become more appealing. Infrastructure remains the most popular asset class, followed by listed equities and hedge funds.

Energy transition also emerged as a top investment theme. About 30% of SWFs and central banks consider it a high-priority allocation, with renewable and cleantech investments aligning with long-term, steady returns and societal benefits.

“Cautious optimism about the global economic outlook has been tempered by growing concern over competition between global powers”, said Rod Ringrow, head of official institutions at Invesco. “The long-standing rivalries between the major powers have escalated, and the picture is complicated further by the sequence of important elections taking place this year, particularly in the US, which could have profound implications for markets.”