2021 Institutional Outlook

Natixis macro specialists discuss results of the 2021 Natixis Global Survey of Institutional Investors and break down potential risks and opportunities in the new year.

The 2021 Natixis Investment Managers Global Survey of Institutional Investors provides insights on how institutions are thinking about risks and opportunities in an uncertain year ahead. In a recent Natixis Access Series talk, Natixis Center for Investor Insight Executive Director Dave Goodsell hosted macro specialists Jack Janasiewicz and Esty Dwek for an analysis of the survey’s findings.

Here are some excerpts from the talk.

Our 2021 report suggests that few institutions think that GDP in their home country will return to pre-Covid levels in 2021. Asia is the exception to the rule, where 41 percent of respondents see a return happening before the end of next year.1 Esty, how do you see this playing out?

Dwek: I think your last point is exactly it – there are a lot of regional differences. We have started to see growth divergences, with Asia clearly in the lead. The Chinese economy is expected to post positive growth for 2020 as a whole – probably one of the very few countries to do that. We know it takes time to get back to normal. Asia in 2021 is possible, the US probably more likely 2022, Europe will be 2023 and beyond.

Jack, what we’re hearing is that institutions are looking for increased spending from consumers and businesses – an uptick in productivity.1 What matters most here?

Janasiewicz: From a business and a household perspective, that spending pattern matters the most. Specifically, in the United States, about 70 percent of the economy is driven by consumption and domestic demand. The US growth engine is highly dependent on the US consumer and that consumption pattern. If you extrapolate that out to the entire world, with China and the US being the global growth engines, you can see how important that is to the global backdrop. I think there’s quite a bit of pent-up demand waiting to be unleashed in here.

The economic numbers have been largely driven by the goods-producing side of the equation. I think when we start to get to that reopen theme, as the economy starts to return to normal, that shift will then go to the services sector side, but the bottom line here is that spending does matter.

One of the things we saw was about 15 percent of institutions say that the stock market will signal recovery. Yet in the same survey, same group of people, we see 8 out of 10 telling us that people are mistaking a strong stock market for a strong economy.1 What do investors have to watch out for here?

Janasiewicz: I think the general trajectory of the stock market does have to fall back on the growth prospects, but shorter-term cycles within the stock market can deviate quite a bit. I think the big thing to hammer home on that difference is the composition of the equity markets. Typically, the S&P 500® is much more manufacturing-driven, whereas the US economy is much more services-driven.

That means the goods-producing side of the equation still held up, which was good for corporate profits, which is why the S&P held up. Whereas the economic backdrop struggled with lockdowns, because the services side got hit pretty hard – but the services sector really doesn’t flow through to corporate profits, and that’s the bigger driver here with the S&P 500®.

As you said, markets have been fairly resilient, but 8 out of 10 institutions we surveyed think that the market is underestimating the long-term impact of Covid-19.1 What do we have to worry about here? Are these concerns merited?

Janasiewicz: When I look at the number of people that are calling for a correction, as a strategist I think that’s a good sign, because that keeps that risk appetite in check. When everybody’s on the same page, everybody’s optimistic, everybody’s bullish, sentiment is getting extended, that’s when I start to get a little worried, because at that point, maybe the marginal dollar’s already into the market.

Dwek: That’s exactly it. Especially when you look at the performance in the last month or so with the vaccine news, with the US elections behind us, there’s a lot of optimism that’s embedded in the markets, and a constructive view that Jack and I still hold has definitely become much more consensus now. That consensus view is maybe what worries us.

There’s still trillions of dollars sitting in money markets, plenty of people who’ve missed the rally, so it’s going to be a question of the fundamentals holding up. So far they’re very strong, with ongoing support from central banks, which is pretty much a given at this point. We’re waiting for US fiscal stimulus, which looks like it’s going to come in the next month or so. It’s rare to see such a recovery so quickly after a crisis on the scale we’ve seen. But that’s also one of the reasons people think at some point, something’s got to give, and we’re going to have another downturn. But there’s all this cash on the sidelines, and that probably limits corrections as well.

We also see 8 of 10 institutional respondents saying that active management will outperform passive management in 2021 and 6 in 10 predicting value will outperform growth.1 Why might this be?

Dwek: We’ve seen growth outperform for a number of years and we’ve seen that go almost to an extreme throughout the crisis, with technology, healthcare, and communication services proving defensive earnings, proving resiliency – huge outperformance.

But we’ve started to see a rotation already with the optimism about the recovery in 2021. You’re seeing people move back into cyclicals – whether you want to call it the reopening trade, the catch-up trade, the value trade, the cyclicals trade – ultimately we’re seeing this rotation come through and a bit of a move from the US to non-US.

I think it comes back to valuations. You have some people thinking – are some of these stocks too expensive for what I’m getting? Ultimately, when you’re expecting this type of rotation, or you’re thinking that you’re going to get more dispersion in the returns, it’s better for active management. Some names have really run up this year, and people think maybe fundamentals haven’t quite followed. Investors are hoping to have that active manager pick and choose those opportunities and those winners where you’re still getting a good deal compared to intrinsic value.

Janasiewicz: I have a little bit of a different take on valuations. To me, valuations are an opinion – we all have an opinion – you might be right, I might be right. The truth probably lies somewhere in the middle. I think the overriding factor is risk appetite. Risk appetite is what drives the market. We can overshoot in significant ways on valuations if risk appetite continues to grind higher. If risk appetite continues to remain very strong, we’ll likely overshoot what a lot of people consider expensive valuations.

Esty, 20 percent of institutional respondents say they’re going to trim government debt, 30 percent say they’ll look to add investment grade corporates.1 What are your thoughts on fixed income?

Dwek: Well, at some point, they need yield. They need income to match liabilities, they need to match long-term commitments. Yield is going to be the biggest question for institutional investors. On the sovereign side, we’d expect yields to rise gradually as things reopen. In investment grade, you pick up a bit more yield, but there can be regulatory constraints. I personally like emerging market hard currencies. Local currencies should do well against the dollar, but you’re taking on a bit more volatility and you do have to be pretty selective. But we’re also seeing this move towards private assets, and I think that’s only going to grow in the coming years.

One of the things we’re seeing is a large number of institutions are saying that ESG strategies are going to outperform in this market – what’s your view on that?

Dwek: Not a surprise. We’ve seen institutions leading the way towards ESG-related investments. We also saw a lot of these ESG strategies broadly outperform throughout the downturn in the spring. You’re seeing a bit of a regulatory push, at least in Europe, towards ESG as well. I think more and more investors don’t feel like they have to choose between ethics and performance, and that’s only going to reinforce the move towards ESG strategies.

View the full results of the 2021 Global Survey of Institutional Investors.
1 Natixis Investment Managers, Global Survey of Institutional Investors conducted by CoreData Research in October and November 2020. Survey included 500 institutional investors in 29 countries throughout North America, Latin America, the United Kingdom, Europe, Asia and the Middle East. The data shown represents the opinion of those surveyed, and may change based on market and other conditions. It should not be construed as investment advice.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions of the authors as referenced are as of December 8, 2020 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

All investing involves risk, including the risk of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided. Value investing carries the risk that a security can continue to be undervalued by the market for long periods of time.

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S&P 500® Index is a widely recognized measure of US stock market performance. It is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation, among other factors. It also measures the performance of the large-cap segment of the US equities market.

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