Majority of institutional investors expecting recession, stagflation challenges in 2023: survey

Read: Global pension plan sponsors concerned about recession, stagflation: survey

While more than half (54 per cent) of respondents said they expect ongoing interest rate hikes next year, nearly three-quarters (73 per cent) don’t believe monetary policy alone can curb inflation and 54 per cent predicted inflation will remain the same or move even higher despite rate hikes. Another three-quarters (72 per cent) said they think rising interest rates will usher in a resurgence of traditional fixed income.

In addition, 77 per cent said they think ongoing supply chain disruptions will hinder economic growth and 62 per cent believe shifting supply chains from global to domestic and “friendly” markets also will slow growth. More than half (57 per cent) of respondents ranked war as the biggest threat to the economy, followed by deteriorating relations between the U.S. and China (40 per cent) and liquidity risks (36 per cent). Nearly three-quarters (74 per cent) said they think China’s geopolitical ambitions have reduced its investment appeal, while 66 per cent agreed emerging markets are overly dependent on China.

Nearly two-thirds (63 per cent) of institutional investors said they’re bullish on private equity and 43 per cent said they’re likely to increase private equity allocations, particularly in energy, information technology and infrastructure.

Sixty per cent said they think large-cap stocks will outperform small caps, with outperformance likely in the health-care, energy and financial sectors. And while 61 per cent agreed the ongoing prevalence of remote work will result in a sharp depreciation of commercial real estate assets, they remained committed to real estate and are investing in non-traditional or thematic-driven spaces, such as data centres and senior, student and affordable housing.

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The survey also found 57 per cent of institutional investors expect stock volatility to rise, while 64 per cent expect bond volatility to decrease. Three-quarters (76 per cent) expect gold to outperform cryptocurrency and nearly two-thirds (62 per cent) expect developed markets to outperform emerging markets. As well, two-thirds (67 per cent) think actively managed funds will outperform passive and that portfolios with a mix of stocks, bonds and alternative strategies will outperform those with a traditional 60/40 mix of traditional stocks and bonds.

Within equities, respondents said they’re most likely to increase allocations to U.S. stocks (40 per cent) followed by Asia-Pacific (31 per cent) and emerging markets (32 per cent). Within fixed income, 63 per cent said they’ll look to short-term bond exchange-traded funds to counter duration risk, while nearly half said they’re increasing allocations to government bonds (48 per cent) and investment grade bonds (49 per cent).

And nearly two-thirds (62 per cent) of institutional investors said believe there’s alpha to be found in environmental, social and governance investments and 59 per cent said they plan to increase their ESG allocations. Half (50 per cent) said they plan to increase allocations to green bonds, a percentage that increases among respondents in Asia (68 per cent), Europe, the Middle East and Africa (54 per cent) and the U.K. (51 per cent). By comparison, only 25 per cent of North American institutional investors said they plan to increase ESG allocations.

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