Keep calm and invest on
Institutional investors predict the volatility that rocked markets across the globe at the end of 2018 will continue into the new year, and expect that the long-running U.S. bull market will soon come to an end — if it hasn’t already.

Their outlook for the year ahead? They foresee that both equity and bond volatility will be up, and interest rates will rise. Will that make them change their allocations? Not necessarily.

Despite the many potential market challenges, six in ten say institutional investors are prepared to handle the risks in 2019 – and aren’t ready to dial back their average long-term return assumptions of 6.7%. And even with potentially stronger headwinds, 77% of respondents believe those assumptions are realistic.

This is driving how they are looking at portfolio allocations and sector calls for 2019. They see risks ahead with rising rates and volatility spikes. But while they are making some shifts, they are largely holding steady – for now. Our most recent survey of institutional investors reveals their outlook for the coming year, as well as nine trends driving their longer-term investment strategy.

The transition from low yields to rising rates

After ten years at or near zero, interest rates are on their way up. This presents a new risk challenge for institutions.

  • 75% are concerned that prolonged low rates have created asset bubbles.
  • They are more worried about the pace — rather than the size — of interest rate increases.
  • 56% believe rate hikes will have a negative impact on performance.

 

Volatility is the new reality

Low market volatility has helped bolster investment returns over the past ten years. But as rates rise, many expect a return to historical norms that make volatility a more significant factor.

  • 52% surveyed say volatility is a portfolio risk.
  • The same number say dispersion (variances in the co-movement of security prices) will increase in 2019, which is one reason that many may be focused on active management.

 

Active management matters more

With volatility back in the mix, institutions are focused on active management, allocating 70% to active - and only 30% to passive.

  • 79% surveyed say market conditions favor active management in 2019.
  • 78% of institutional decision makers are willing to pay a higher fee for outperformance.

 

The expanding role of private assets

Thanks to uncertain returns and rising rates in traditional securities markets, many institutional investors are turning to private markets to enhance portfolio performance.

  • 72% say the returns of private equity are worth the liquidity risk.
  • 60% say diversification is one of the main reasons they invest in private assets.

 

Asset bubbles are expanding

At the tail end of a ten-year bull market, institutional investors see the potential for bubbles across a number of assets - and 71% believe that individual investors are completely unaware.

  • Cryptocurrency – 64% of institutions say there is a cryptocurrency bubble. But with Bitcoin declining 73% and Ethereum declining by 85% since January,1 it may already have burst.
  • Technology – 45% think there is a tech bubble. Did the Q4 sell-off in FAANG stocks help equalize the pressure - or is a bigger explosion yet to come?
  • Stocks – 41% of institutions see a stock market bubble on the horizon.

 

Political upheaval means market upheaval

Two years after Brexit and a Trump presidency became reality, geopolitics continue to loom large over investment sentiment.
  • What’s threatening global financial security? 44% say geopolitics, while 37% point to trade disputes.
  • 77% say geopolitical events will have a negative impact on portfolio performance.

 

Who will foot the bill on public debt?

One of the realities of the post-crisis market has been the explosion in public debt. And as debt totals have grown, so have the risks. The problem of public debt may be further compounded by the rising rate environment. Much of this new debt was taken out with rates at all-time lows.

  • Six out of ten believe the growing debt crisis poses a threat to global financial security.

 

A new crisis is lurking in the wings

Markets have been free of a major catastrophe for a decade. Institutions grew assets and navigated the short-term pressures with ease. But all good things come to an end - and institutional investors predict that we’ll see the next global financial crisis within the next five years. Their top five threats?

  • 62% public debt
  • 48% asset bubbles
  • 44% geopolitics
  • 37% trade disputes
  • 22% aging populations

 

Keep calm and invest on

As you can see above, institutional investors have their eye on the long term. With average time horizons of ten years or more, they’re looking beyond factors that will impact short-term performance to identify the trends that will drive portfolio strategy for years to come. The bottom line? They’re holding steady right now.

 


Read the full Report

Learn more about what’s keeping institutional investors up at night ten years after the global financial crisis.

About the survey
Natixis Investment Managers, Global Survey of Institutional Investors conducted by CoreData Research in October and November 2018. Survey included 500 institutional investors in 28 countries.

 


1 Percentage change in end-of-day prices between December 31, 2017 and November 26, 2018.

Unlike passive investments, there are no indexes that an active investment attempts to track or replicate. Thus, the ability of an active investment to achieve its objectives will depend on the effectiveness of the investment manager.

This material is provided for informational purposes only and should not be construed as investment advice.

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.

Natixis Distribution, L.P. is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.

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