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Global money managers say next GFC is on its way

By James Mitchell
4 minute read

Record levels of debt combined with low economic growth are driving fears among 83 per cent of institutional investors that a major financial crisis will hit the global economy within five years.

Natixis Investment Managers today released its annual global survey of 500 institutional investors at corporate pension funds, endowments and foundations, public or government pension funds, insurance companies and sovereign wealth funds in Asia, Australia, Europe, North America, Latin America and the Middle East.

The report found that 83 per cent of responding institutions, which oversee over US$15 trillion in AUM, including 19 in Australia, expect a global financial crisis within the next five years. Nine in 10 are concerned about record levels of public debt as they look ahead at trends to shape 2020.

As public debt levels continue to hit new records, the majority (89 per cent) of institutional investors are concerned about the impact on the global economy. This bearish sentiment towards indebtedness has influenced the outlook for the next global financial crisis with eight in 10 (83 per cent) respondents expecting a downturn within the next five years and 58 per cent even sooner, between one and three years.

“Institutional investors have been faced with a complex selection of macro-economic challenges with which to inform their portfolio construction decisions for 2020,” Natixis Investment Managers Australia CEO Damon Hambly said. 

“There is a general expectation of a global slowdown sooner rather than later, but we have seen institutional investors adopting a ‘wait and see approach’ this year – rather than making any meaningful changes to their portfolios.”

With volatility rising and ongoing low rates presenting challenges, about half of institutions (46 per cent) believe dispersion will also be up. The resulting increased spread between security prices, may be one reason why 75 per cent of institutional investors say today’s markets favour active management. 

Investors are carrying majority weighting to active investments (71 per cent) in order to address this increasing market volatility and expect to maintain their 70 per cent active to 30 per cent passive split over the next three years.

ESG on the rise 

Sixty-four percent of institutions report they implement some form of ESG in their portfolios. Even though institutions have generally been on the leading edge of the practice, this represents a nearly 10 per cent increase over 2017 when 40 per cent did not implement ESG.

More often than not, institutions are investing for the upside potential with more than half (54 per cent) of institutions saying there is alpha to be found in ESG. Nearly the same as the number who say they invest in ESG to align their assets to organisational values (57 per cent). Almost four in 10 (37 per cent) implement ESG as a way of minimising headline risk.

Search for yield continues 

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 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).

Louise Watson, head of distribution at Natixis Investment Managers, said a decade of low rates and economic growth – and no real expectation of a change any time soon have pushed investors towards alternative sources of yield. 

“It’s not surprising that nearly seven in 10 say private investment will play a more permanent role in portfolios, because traditional assets are not offering the return institutional investors need to reach their long-term goals. They are also concerned about an economic downturn, and alternative assets offer diversification and risk mitigation benefits,” Ms Watson said.

“Australian investors understand that uncertainty in global politics [makes] all markets more volatile and that the current ‘lower for longer’ interest rate environment will make their hunt for yield challenging. 

“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.”