Faced with geopolitical uncertainty and limited options to increase risk asset allocations, sovereign investors are making fewer allocation changes than in any point in the past five years, according to Invesco’s fifth annual global sovereign asset management study.

It found sovereign investors consider low interest rates the greatest tactical asset allocation factor, driving increasing allocations to real estate as they seek alternative sources of generating income. For future allocations, Brexit (82 per cent) and the election of President Donald Trump in the United States (68 per cent) are expected to grow in importance as the implications of political shifts on investment performance becomes more clear.

Over the past three years, respondents to Invesco’s survey have ranked the U.S. as the No. 1 market in terms of attractiveness, and the country has retained its top spot this year with a score of eight out 10. The U.S. is also ranked top in terms of asset allocations, with 37 per cent of respondents reporting overweight new flows to North America in 2016 relative to their total portfolio, while 40 per cent are planning to overweight further in 2017.

This attractiveness is driven largely by interest-rate rises as well as market confidence of a pro-business corporate tax regime under President Trump, according to the survey. However, it found long-term confidence is still restricted by uncertainty around whether Trump will deliver on policy promises, and positive views on potential infrastructure investments in the U.S. are hampered by concerns about growing protectionism limiting access for foreign sovereigns.

Britain saw the biggest drop in attractiveness to respondents, down to 5.5 out of 10 from 7.5 last year. Brexit is seen as a significant negative for British investment, and sovereigns with European interests questioned the future of Britain as an investment hub for Europe, given uncertainty over taxes on imports and market access, according to the survey.

There’s no surprise, then, that sovereign allocations to Britain were down in 2016, with 33 per cent of respondents reporting being underweight on new flows to Britain compared with 13 per cent that reported new overweight positions to Britain, while the rest (54 per cent) cited no change. However, when the fall of the pound is taken into account, British allocations remain relatively stable, with stated allocation declines of -15 per cent likely linked to the corresponding drop by 16 per cent in the value of the pound relative to the U.S. dollar, rather than withdrawals, according to the study, which notes that the fall in the value of the pound has led to a rally in British stocks.

The rest of Europe also saw a fall in sovereign allocations, the survey found, from 12.8 per cent of assets under management last year to 11.2 per cent this year as the risk of wider European Union disbandment appeared to be growing. However, Germany stands out from its European neighbours as one of the most attractive investment destinations globally for sovereigns, increasing from seven out of 10 last year to 7.8 this year. According to Invesco, Germany’s popularity is attributed to its perceived safe-haven status and positivity towards Germany has increased based on its economic strength.

The survey also found the return environment has, on the whole, remained challenging for sovereigns that have underperformed their target returns by two per cent on average. Over the past three years, governments have responded to poor economic performance by reducing new funding to sovereigns (on average, down from eight per cent in 2015 to five per cent in 2017) and cancelling investments (down from -1 per cent in 2015 to -3 per cent in 2017).

“Last year was challenging for sovereign investors with concerns surrounding funding levels and return expectations remaining front of mind amidst added macro-economic and political uncertainty,” said Alex Millar, head of Europe, Middle East and Africa sovereigns and Middle East and Africa institutional sales at Invesco, in a news release.

“Demand for alternatives like infrastructure has been a consistent theme in past years, but this year the challenge of increasingly scarce supply is compounded. While investors have fewer asset allocation levers with which to respond, they are delving deeper into more supply-rich real estate markets, and looking to the U.S. and Germany for opportunity and economic strength.”