More than half (53 per cent) of the world’s largest pension funds say the prospect of a global recession is their No. 1 short-term concern and the same percentage expect a recession to take place in the next 12 months, according to a new survey by the Official Monetary and Financial Institutions Forum.

The survey, which polled 22 global public pension funds with combined assets under management of US$4.3 trillion, found the top factors impacting investment approaches over the next 12 to 24 months were inflation (roughly 20 per cent), climate change (roughly 20 per cent), geopolitics (nearly 10 per cent) and technological change (roughly five per cent).

Private equity saw lower net demand than in previous years, with more than half of respondents
highlighting illiquidity (71 per cent) and valuations (57 per cent) as primary barriers to investing more in private markets.

Read: Prospect of global economic slowdown tops list of institutional investor concerns: survey

Two-fifths (40 per cent) of pension funds said they expect to increase their exposure to infrastructure over the next 12 to 24 months, while more than 10 per cent indicated they’ll increase allocations to commodities and government/inflation-linked bonds. Notably, just 13 per cent of respondents said they expect to reduce their exposure to real estate.

“About 15 per cent [of funds polled] suggested they will increase their exposure to real estate, but close to 30 per cent suggested they’re looking to draw down the holdings of real estate assets,” says Nikhil Sanghani, managing director of research at the OMFIF.

When it comes to investing in China, nearly three-quarters (73 per cent) of respondents highlighted regulation and geopolitics as the main deterrents. And none of the respondents indicated a positive outlook for its economy or expected higher relative returns from Chinese assets. Rather, 40 per cent selected India as the most attractive emerging market due to its government’s investment in infrastructure.

Read: Global investors increasing allocations to infrastructure, real estate: survey

“We asked the question of what’s the most attractive emerging market [and] the most popular answer was India,” says Sanghani. “Quite a few selected Brazil [and] Mexico. Indonesia is perhaps an area which could benefit . . . from the green transition because [it’s] rich in certain commodities that would assist the green transition.”

When asked about the most important economic factor impacting their investment strategy over the next five to 10 years, half (50 per cent) of pension funds identified equilibrium real interest rates and a quarter (25 per cent) cited demographics. Indeed, nearly three-quarters (71 per cent) said they’re exploring new asset classes or methods of diversification in response to changing demographics.

Almost all funds said they integrate environmental, social and governance factors into their portfolio decisions and more than 30 per cent indicated they’re going to increase allocations to green bonds and green real assets in the near term, says Sanghani. “But when you ask, in a more general sense, . . . what [they’re] planning in this . . . ESG space, . . . it’s very much a sense of increasing investment in green and sustainable industries — renewable energy [and] greenfield projects . . . seem to be a more popular route.”

Read: Majority of global public investors focused on ESG policies: report