Commentary December 08, 2021 at 07:44 AM Share & Print
What You Need to Know
- The survey polled 500 institutional investors in 29 countries that collectively manage $13.2 trillion in assets.
- They’re ready with tactical allocation moves to counter rising rates, lingering inflation and higher stock and bond market volatility.
- Despite the threat of supply chain disruptions and ongoing COVID-19 concerns, they see plenty of growth potential.
Institutional investors are heading confidently into 2022, ready with tactical allocation moves to counter their expectation of rising rates, lingering inflation and higher stock and bond market volatility, according to survey findings published Wednesday by Natixis Investment Managers.
Despite the threat of supply chain disruptions and ongoing COVID-19 concerns, institutional investors see plenty of growth potential in a market they say is both driven and distorted by fiscal and monetary policies and which could spell trouble for unprepared individual investors.
Natixis Investment Managers Global Survey of Institutional Investors conducted by CoreData Research conducted a survey in October and November among 500 institutional investors in 29 countries that collectively manage $13.2 trillion in assets. These included responses from nearly 100 institutional investors in the U.S. that collectively manage $1.3 trillion in assets.
A majority of respondents to the global survey agreed that the following would likely be next year’s market-driven headlines:
- Reopening trade outperforms stay-at-home trade
- Small-caps outperform large-caps
- Value stocks outperform growth
- Emerging markets outperform developed markets
- Big tech will continue to grow unabated
- Funds strong on environment, social and governance outperform those that aren’t
- Actively managed funds outperform passive investments
The survey found that although inflation ranks as institutional investors’ top portfolio risk concern in 2022, three in five respondents think the current spike in inflation is temporary. In the U.S., 61% of institutions see inflation as more of a secular trend that will play out gradually over time.
Natixis IM said the presence of real inflation for the first time in more than a decade, coupled with expectations by 48% of institutional investors of a full economic recovery from pandemic disruptions next year, may explain why 73% of institutions, including 83% in the U.S., expect policymakers to raise rates in 2022.
“Institutional investors are clearly telling us they expect the market to look very different next year than what it does today, and they are positioning their portfolios to withstand whatever is thrown at them,” Liana Magner, Natixis IM head of retirement and institutional in the U.S., said in a statement.
“While inflation poses a number of long-range economic issues, interest rate policy presents institutional teams with immediate investment challenges. The upside is an expansion of investment opportunities and emerging growth potential in a market ripe for active management.”
Tactical Asset Allocation Moves
The survey results showed that few institutional investors are making dramatic allocation changes heading into 2022. However, most will make tactical moves that reflect the new realities of living and prospering in the pandemic era and to position portfolios for opportunistic and risk-adjusted returns.
Forty-eight percent said they expect the spread between security returns, or dispersion, to widen next year, creating greater potential to outperform benchmarks.
Overall, 35% of institutions said they plan to decrease their exposure to U.S. equities while allocating more to emerging market, European and Asia/Pacific stocks.
Sixty-eight percent of institutions said that as rates normalize, they will look at short-term bonds and ETFs to counter duration risk in their bond portfolio. Meanwhile, many are looking further afield for income; 68% said they are increasingly using alternative strategies over fixed income to generate yield.
At present, 84% of institutions are investing in private equity, 81% in private debt and 81% in infrastructure. Of these, 91% plan to maintain or increase their investments in private equity and private debt next year, while 97% say the same for infrastructure investments.
Natixis IM noted that recent passage of the Infrastructure and the JOBS Act in the U.S. and other global actions appear to have boosted institutional investors’ confidence in both infrastructure investments and green bonds.
New Realities, Emerging Trends
What will 2022 look like? Forty-two percent of institutional investors survey said they expect COVID variants to continue to be a disruptive force, while 58% said the more likely scenario is that much of life will revert to how things were before the pandemic.
The survey found that 62% of respondents expect pent-up demand for big-ticket items to be a significant driver of growth in 2022. Forty-one percent overall, and 52% in the U.S., expect consumers to spend more next year — 22% see high levels of “revenge spending” as people splurge after a long period of isolation and restrictions.
Eighty-five percent said they expect most employers to move forward with a hybrid work model, pointing to a broad return to the office for many workers.
A similar percentage said major supply chain disruptions will greatly hinder the pace of economic growth, but only 48% think new coronavirus variants will slow recovery — a reflection, Natixis IM said, that the world may be learning to live with COVID as endemic.
Institutional investors in the survey predicted that these stock sectors are most likely to outperform: energy, health care, information technology, financials and consumer discretionary. The most attractive private equity investments are in information technology, health care and infrastructure.
Red Flags for Individual Investors
Majorities of institutional investors said they expect higher volatility in stocks, bonds and currencies in the year ahead, according to the survey. Yet, they continue to manage toward a long-term return assumption of 7%, on average, and with an eye on balancing present needs with future liabilities.
As for individual investors’ long-term return assumptions, Natixis IM surveys found, they stand at 14.5%, twice that of institutional investors and 174% more than the 5.3% returns financial professionals think are realistic.
“Institutions are prepared to navigate a wide range of risks, and individual investors may want to take note,” Dave Goodsell, executive director of Natixis IM Center for Investor Insight, said in the statement. “In many cases, they ignored the fundamentals of investing yet still managed to do well for this year.”
Next year may not be as kind, Goodsell said, especially for investors who have taken on too much risk or are overly reliant on passive index funds.
“They may want to take a cue from some of the largest, most sophisticated investors in the world, who call for active management, disciplined rebalancing and a block and tactical approach to portfolio positioning to be successful next year,” he said.
The consensus among 78% of institutional investors is that, since the pandemic began, individual investors have been more carelessly engaging in speculative, high-risk investments.
In addition, they see the top portfolio risks next year — inflation, interest rates, valuations and volatility — driven by fiscal and monetary policies that could come back to bite individual investors.
For example, many think the fiscal stimulus currently provided by the government will lead to tax hikes, unchecked inflation and possibly even stagflation. Nearly half believe that the heightened level of government spending has increased the overall risk of a future financial crisis.
Despite record market highs, only 13% of institutional investors see stock market performance as a good indicator of economic health.
Moreover, 81% think low interest rates have distorted valuations, 71% believe current valuations do not reflect company fundamentals — indeed, 21% think valuations do not even matter anymore.
Seven in 10 said the stock market’s current rate of growth is unsustainable, and nearly as many predicted that the bull market will come to an end once central banks stop printing money.
Fifty-eight percent of institutional investors opined that one reason the market is ignoring fundamentals is because of the widespread use of passive investments, which 67% said exacerbates market volatility when there are large flows into and out of passive index funds.
Half believe the popularity of passive investments has further distorted relative stock prices and risk-return trade-offs.
Some two-thirds of institutional investors also believe that easier access to trading could ultimately threaten the retirement and financial security of many retail investors. Six in 10 predicted that the meme stock phenomenon will continue to create risky financial bubbles.
The top contender for a major correction next year? Cryptocurrencies, which 72% of respondents believe are not an appropriate investment for most retail investors anyway.
Still, 41% of institutional investors said they now recognize digital or cryptocurrencies as a legitimate investment option, although 87% agreed that central banks eventually will need to regulate them.