Institutional investors expect recession next year; most view stagflation as bigger problem

Written by Adam Cadle

08/12/2022

Institutional investors from around the world are heading towards 2023 with a “sombre view”, according to Natixis Investment Managers (IM), with 85% believing they are or will be in recession next year.

However, more than half of those surveyed thought that recession was necessary to bring inflation under control.

While most believed they were heading for recession, 65% viewed the risk of stagflation as worse than the risk of recession.

Nearly half (49%) thought that an engineered soft landing down from heightened inflation was unrealistic.

Despite this, 72% of those surveyed believed that rising interest rates would usher in a resurgence in traditional fixed income investments, while 56% were bullish on bond markets in 2023.

“Despite strong economic headwinds, institutions are remarkably bullish on most asset classes, and they see opportunistic growth for active managers amid ongoing market disruption,” said Natixis IM executive managing director & head of Northern Europe & MENA, Andrew Benton.

“After a decade of soaring share prices fuelled by low-interest rates, 2023 is the year the market recognises again that valuations matter and the case for traditional fixed income is more compelling.”

Nearly half (47%) of institutional investors said they thought real estate would underperform next year amid declining house prices.

Meanwhile, they are most bullish on private equity, with 62% believing the asset class will perform well, followed by bonds (56%).

Natixis IM noted that, with renewed interest in bonds and as central banks phase out their asset purchase programmes, liquidity was bubbling up as an issue.

The proportion of institutional investors who cited liquidity as one of the biggest portfolio risks next year nearly tripled year-on-year, from 13% to 36%.

More than half (53%) of the world’s largest investors were actively de-risking their portfolios with tactical allocation moves, which showed a shift to quality in fixed income and alternative strategies.

In this shift, 62% believed there was alpha to be found in ESG, and 59% were planning to increase ESG investments.

Half of those institutions that own green bonds globally planned to increase their investments, while almost the same number said they will maintain their current allocation.

“Even with rates on the rise, a decade-long quest for yield may still be hounding investment teams as 61% say their organisation are turning to alternative investments as a yield replacement,” Natixis IM said.

“The largest number (44%) plan to increase allocations to infrastructure in 2023, 43% plan to increase allocations to private equity and 36% to private debt investments.

“Alternatives allocations are also a tactic to mitigate risk as two-thirds of institutions say a portfolio composed of 60% equities, 20% fixed income and 20% alternatives is likely to outperform traditional 60/40 portfolios.”

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