Most central bank reserve managers who took part in UBS Asset Management's latest Reserve Manager Survey now judge stagflation to be the most likely economic backdrop over the next five years, according to results presented after a seminar in Wolfsberg, Switzerland.
The annual poll, which collected views from around 30 leading central banks at UBS's Reserve Management Seminar in Wolfsberg, Switzerland, shows 52% of respondents selecting stagflation as the most likely five-year scenario - up from 39% the previous year.
Inflation and rates dominate
Survey participants signalled that inflation dynamics and rising yields have moved back to the centre of their concerns. Some 82% cited rising U.S. rates and inflation as the principal issue for foreign exchange reserve investment decisions. In addition, 79% of respondents expressed the view that "we have entered a period of higher inflation that will persist for a longer period of time."
Massimiliano Castelli, Head of Strategy and Advice at UBS Asset Management, summed up the change in priorities by saying: "inflation and rising long-term yields have moved back to the centre of concerns," and that reserve managers are "moving slowly towards a more multipolar currency system" with the euro and renminbi as the main beneficiaries of diversification trends.
Portfolio shifts and diversification
The survey points to accelerating diversification out of U.S. assets. About 42% of respondents reported having reduced, or planning to reduce, exposure to U.S. assets, an increase from 29% in 2024. That shift accompanies a reassessment of which assets are expected to perform best over the coming five years.
Gold's attraction as a top pick has declined sharply: only 29% of respondents now view gold as the best-performing asset class over a five-year horizon, down from 67% a year earlier. At the same time, developed and emerging market equities are being seen more favourably on a risk-adjusted basis.
Views on central bank independence
The survey also asked about perceptions of U.S. monetary policy governance. Some 56% of respondents said that the appointment of Warsh as Fed chair "has somewhat weakened Fed independence."
Takeaways for markets
- Reserve managers are positioning for a higher-inflation, higher-yield environment, which is influencing currency allocations and the balance between fixed income, gold and equities.
- Diversification trends are accelerating, with the euro and renminbi cited as likely beneficiaries of a shift away from concentrated U.S. asset exposure.
- Perceptions that Fed independence has been affected could factor into reserve management and market sentiment around U.S. policy decisions.
Where the survey provides limited detail, it reflects the aggregate views reported by participants rather than specific portfolio moves or timing. The results describe prevailing sentiment among the group surveyed and show how those attitudes are reshaping reserve allocation preferences.