CPP Investments and others shift focus to the U.S. as China's slowdown and trade policies raise concerns
Several of Canada's largest pension fund managers are reducing their investments in emerging markets such as China and Latin America, influenced by geopolitical uncertainties that steer investors towards less risky assets, as reported by The Logic.
The Canada Pension Plan Investment Board (CPP Investments), the nation's largest retirement fund manager, exemplifies this trend.
At the end of its fiscal year on March 31, 2024, investments in developing regions constituted 20 percent of its portfolio, a decline from 22 percent the previous year and the lowest since 2019.
In its annual report, the firm stated, “As part of our review of the Strategic Portfolios over the past year, we revisited our appetite for Emerging Markets and adjusted our long-term geographic allocations to reflect updated views.”
John Cho, head of KPMG Canada's private capital team, noted, “There definitely is a trend where institutional investors are, in this environment, more focused on developed markets,” emphasizing the increased risks associated with investments in diverse regions.
This strategic shift marks a significant change for CPP Investments, which manages nearly $700bn in pension assets for approximately 22 million Canadians.
The firm had been progressively increasing its investments in emerging markets over the past decade, with a 2018 projection that one-third of its portfolio would be allocated to these regions by 2025.
However, holdings in developing areas peaked at 22 percent in 2023.
Other Canadian pension funds are adopting similar approaches.
The British Columbia Investment Management Corporation (BCI) reduced its investments in emerging markets and the Asia Pacific region from 15.7 percent of its portfolio in fiscal 2023 to 13.8 percent in 2024.
The Ontario Teachers’ Pension Plan decreased its asset share in the Asia Pacific and Latin America from fiscal 2022 to 2023, as indicated in its latest annual report.
Similarly, the Alberta Investment Management Corporation (AIMCo) lessened its holdings in Asia and “the rest of the world” during the same period.
An analysis of US Securities and Exchange Commission filings shows that five of Canada’s eight largest pension funds, known as the Maple 8, reduced their holdings of US-listed emerging-market stocks by the end of 2024.
These funds include Caisse de dépôt et placement du Québec, Ontario Municipal Employees Retirement System, and Public Sector Pension Investment Board.
Additionally, AIMCo announced the closure of its Singapore office, which had opened in 2023 as part of an Asia Pacific expansion strategy, citing cost reduction efforts.
The initial attraction to emerging markets stemmed from prospects of high returns in countries like China, India, and parts of Latin America.
China's rapid economic growth and expanding middle class offered substantial investment opportunities in sectors such as manufacturing, infrastructure, and technology at more competitive prices than in North America or Europe.
However, several factors have prompted the recent retreat from these markets. China's slower economic growth has dampened investment enthusiasm, with foreign direct investment plummeting by 99 percent over three years, according to Chinese government data.
In India, elevated asset prices in sectors like infrastructure and real estate may deter Canadian investors.
Moreover, lower-than-expected growth in parts of Latin America and the Caribbean has resulted in fewer investment opportunities in those regions.
US President Donald Trump’s protectionist policies and tariff threats have further complicated international trade, contributing to the challenging investment environment in emerging markets.
Cho remarked, “It's just a more difficult environment to invest into emerging markets, and you wonder will you get excess investment returns for the heightened risk?”
Concurrently, some investors are reallocating funds to the US CPP Investments, for example, increased its US portfolio allocation from 36 percent in fiscal 2023 to approximately 42 percent by the end of fiscal 2024.
OMERS reported 53 percent of its assets in the US in 2024, up from 48 percent in 2023, while BCI's US exposure grew from 41 percent to 43.4 percent over the same timeframe.
Cho suggested this trend might persist as Trump's tariff policies encourage companies to relocate manufacturing to the US, thereby creating more domestic investment opportunities.
Regarding Canadian assets, he noted that a weak Canadian dollar could present attractive buying prospects for investors, but it's uncertain how currency fluctuations might offset the economic challenges posed by tariffs.
Despite the shift away from emerging markets, CPP Investments' Chief Investment Officer, Edwin Cass, indicated in an interview with Top1000Funds that viable investment opportunities remain.
Cass highlighted infrastructure projects, such as toll roads in Mexico, Chile, Indonesia, and India, as strong-performing assets. He also expressed optimism about renewable energy investments abroad, aligning with global transitions to lower-carbon economies.
In a related development, a survey by the Official Monetary and Financial Institutions Forum (OMFIF) revealed that sovereign and public funds managing $6.5tn are shifting towards riskier investments as inflation concerns wane.
The survey indicates a “fundamental shift” from fixed income and liquid public markets to private markets, notably in India and sustainable assets.
As inflation subsides, there is a focus on long-term returns, with funds expected to reduce cash holdings and increase allocations to public equities.
India has emerged as the most attractive market, with 58 percent of funds favoring it, replacing China, which faces geopolitical and economic challenges.
Additionally, according to Reuters, there is growing interest in sustainable venture capital, private equity, private debt, and digital infrastructure driven by the AI boom.
