Central bank reserve managers are adopting more selective risk-taking and active portfolio shifts amid macroeconomic and geopolitical uncertainty.

Their focus has broadened beyond headline conflicts to how geopolitics influences inflation, yields, and financial market fragmentation, according to the UBS Asset Management 32nd Reserve Manager Survey of around 30 major central banks.

Massimiliano Castelli, head of strategy and advice, global sovereign markets at UBS Asset Management said: “The biggest change this year is that inflation and rising long-term yields have moved back to the centre of concerns. For reserve managers, these are now the dominant macro risks, surpassing geopolitical factors.

The survey found that 81% of reserve managers have changed their strategic asset allocation in the past year (up from 59%). Notably, demand for gold and inflation-linked bonds remains strong as macro hedges. However, confidence in the precious metal as five-year outperformer has declined to 29% from 67%.

Among equities, both developed and emerging market stocks are expected to perform well. US equities, particularly the “Magnificent 7” technology stocks, are seen as the strongest outperformers, reflecting strong conviction in the AI-driven transformation.  Meanwhile, passive equity allocations by central banks are likely to increase by 35% from 12%.

“Despite a cautious macro-outlook, portfolios still reflect selective risk-taking. Reserve managers are not stepping back from markets, but they are repositioning within them,” said Castelli.

Confidence in the US dollar remains robust, with strong 93% of respondents believing the greenback will retain its safe-haven status (up from 79%), but 61% expect falling demand and gradually rising yields. Average US dollar holdings rose to 59% (from 56%), but 42% reduced or plan to reduce US asset exposure (up from 29%).

However, 56% think Kevin Warsh’s appointment as US Federal Reserve chair has weakened Fed independence.

The renminbi and the euro are the main diversification beneficiaries: 63% see the Chinese currency gaining from macro/geopolitical shifts, and 56% believe the same for the euro.

Stagflation risks

The main risk to economies and markets, said 82% of reserve managers, is persistent inflation and rising long-term yields, surpassing geopolitics, while trade war escalation concerns declined sharply to 18% (from 74% last year).

More than a half (52%) see stagflation as the most likely scenario over the next five years (up from 39%), although Only 14% expect a US recession by June 2027 (down from 43% last year).

The main risk to economies and markets, said 82% of reserve managers, is persistent inflation and rising long-term yields, surpassing geopolitics, while trade war escalation concerns declined sharply to 18% (from 74% last year).

More than a half (52%) see stagflation as the most likely scenario over the next five years (up from 39%), although only 14% expect a US recession by June 2027 (down from 43% last year).