83% of institutional investors predict global downturn within five years

Eighty-three per cent of institutional investors believe there will be global downturn within the next five years, research has found.

Initially reported by out sister publication, European Pensions, according to Natixis Investment Managers’ global survey of 500 institutional investors, increasing public debt and its impact on the economy is a concern for the majority (89 per cent) of those surveyed.

As a result, 83 per cent of respondents expect a global recession within the next five years and a further 58 per cent believe there will be a downturn between one and three years.

Commenting, Natixis Investment Managers head of northern Europe, Andrew Bolton, said: “The last twelve months have handed global institutional investors a complex selection of macro-economic challenges set to test portfolio construction for 2020. This has led them to expect a global slowdown to come sooner rather than later.

“However, despite forecasts of recession in the near term, uncertainty grips investors’ and is so far preventing them from making meaningful changes to portfolios as they adopt a ‘wait and see approach’.”

As well as challenging public finances and the potential for economic downturn, institutional investors are keeping a close eye on the global political environment, which continues to foster uncertainty in the market.

Sixty-nine per cent of respondents agreed that foreign interference in elections is becoming an increasing problem globally, while 64 per cent said the US presidential election campaign is likely to be a major source of market volatility.

As the macro economic environment remains filled with complexity, expectations for increased volatility are on the up. Over half (52 per cent) of institutional investors expect currency volatility to rise in 2020, while over three quarters (77 per cent) expect rising equity market volatility and 62 per cent of respondents expect to see greater volatility in bond markets.

Factors like these may be why institutions rank volatility as their top portfolio risk for 2020 (53 per cent of respondents), but perennially low interest rates (50 per cent) finish a close second. Respondents also worry about the impact of a credit crunch (37 per cent) and liquidity issues (35 per cent), while one in five are on the watch for deflation.

In addition, as interest rates remain at ultra-low levels, institutional investors continue to be challenged to find yield. This has resulted in three-quarters of respondents believing that they have taken on too much risk in pursuit for yield.

Over half of investors (56 per cent) believe negative yielding bonds will increase in 2020, with 54 per cent of respondents being concerned that central banks do not have the tools they need to manage through a new crisis.

The inability to find yield from traditional assets has resulted in institutional investors turning to private markets. Overall they believe private assets are better suited than traditional assets for two critical portfolio functions: delivering diversification (62 per cent) and generating more attractive returns (61 per cent).

The most common strategies are private equity with 79 per cent of institutions investing in the asset class and private debt (76 per cent).

“A decade of low rates and economic growth has resulted in investors looking for alternative sources of yield. As traditional assets do not offer the return institutional investors need to reach their long-term goals and given their expectations about another downturn in the near term, nearly seven in ten (68 per cent) say private investment will play a more permanent role in portfolios going forward,” Bolton said.

“Investors know politics could make markets more volatile and that interest rates could make their hunt for yield even harder. While global growth is likely to remain slow, they are aware it will take time and are patiently waiting to see which trends will actually play out in the year ahead.”

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