A Chinese insurance company buys listed shares of a Swiss bank. A UK pension fund invests in US Treasury bonds. A multinational tech company holds shares of an investment fund in the Cayman Islands.
All the above are examples of portfolio investment assets. These can include both equity and debt securities, though they differ from direct investments in that investors do not control the management of the units in which they invest.
Foreign portfolio investments help global financial markets function and provide investors with the benefits of international diversification. These investments are also beneficial as a source of financing for host economies.
Unlike foreign direct investment, portfolio investments tend to be volatile and, if not well monitored and managed, they can trigger macroeconomic challenges such as overheating of the host economy, loss of export competitiveness due to exchange rate appreciation, and higher vulnerability in the event of a crisis.
Our latest Coordinated Portfolio Investment Survey shows that, amid multiple shocks, global portfolio investment asset holdings decreased by 15 percent in the first half of last year, the most since 2008. The decrease is attributed to both the reduction in investments and valuation effects.
Elevated risk aversion amid increasing energy prices, heightened geopolitical and inflation risks, and tightening monetary policies in advanced economies weighed heavily on capital markets and portfolio investments. The newest CPIS looks at cross-border portfolio investment holdings through June.
As the Chart of the Week shows, the top 10 portfolio investment holding countries, collectively accounting for about two-thirds of global positions tracked by the CPIS, experienced a sharp decline since the last reporting period six months earlier.
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