The survey from Natixis Investment Managers has taken the pulse of 500 investors globally, who collectively manage more than US$13.5 trillion in assets for pensions, insurers, sovereign wealth funds, foundations and endowments.
Four-fifths of those asked do not expect GDP growth to return to its pre-COVID pace until at least 2022, with 35 per cent tipping it could be 2023 or later.
Further, eight in 10 think the stock market’s current pace of growth is unsustainable. As a result, more than half (53 per cent) of investors expect defensive portfolios to outperform in 2021.
Institutions reported that on average they have reduced long-term return assumptions by 60 basis points (6.3 per cent in 2021 compared to 6.9 per cent in 2020).
For insurers, who are more sensitive to the low to negative yields prevailing in the current environment, they have reduced assumptions by 100 basis points (6.5 per cent to 5.5 per cent), a drastic drop from the 7.7 per cent assumed heading into 2017.
Broad asset class allocations will remain relatively unchanged in institutional portfolios however, with investors expecting overall allocations of 36 per cent to stocks, 40 per cent to bonds, 17 per cent to alternatives and 6 per cent to cash.
But investors are looking to make tactical adjustments within asset classes. A third (32 per cent) plan to decrease allocations to US equities to Asia Pacific (32 per cent), European (31 per cent) and emerging market equities (31 per cent).
One-fifth signalled they expect to decrease their exposure to government bonds and increase allocations to investment-grade corporate debt (30 per cent).
Almost half (47 per cent) of respondents said they are expecting to increase allocations to private debt, while four in 10 expect to up their exposure to infrastructure and 38 per cent said they would increase their investments in private equity.
Damon Hambly, chief executive, Australia at Natixis said investors have remained cautious despite the news of vaccines.
“With more volatility ahead and concerns about the long-term impact of the massive stimulus measures used to cushion the blow of the pandemic, two thirds of investors told us that the best response is active management and a diversified, defensive portfolio,” Mr Hambly said.
“Having said that, overall asset allocations are likely to remain relatively unchanged in institutional portfolios, although tactical adjustments within asset classes will be used to respond to the current economic environment. These include green bonds within a fixed interest portfolio, away from US equities in favour of Asia-Pacific and a broadening of alternative strategies including an increased allocation to private debt.”
Value tipped to overtake growth
In the year ahead, a larger share of institutional investors anticipates value to outperform growth (58 per cent) and large cap to outperform small cap (53 per cent).
Slightly more than half (52 per cent) think emerging markets will outperform developed markets, though the vast majority (86 per cent) agree on the need to be more selective in pursuing emerging market opportunities.
Two-thirds expect large tech companies to outperform in 2021, with information technology and healthcare forecast to continue as the big winners in the market, while energy, real estate, consumer discretionary and financials are anticipated to underperform.
Around two-fifths of institutions (44 per cent) believe corrections are due for the stock market – pointing to real estate (41 per cent), tech (39 per cent) and bond markets (29 per cent).
To manage risks, more than eight in 10 (80 per cent) said that equity factor diversification is an important consideration, while 71 per cent said they are willing to underperform their peers to ensure downside protection.
Louise Watson, Natixis Investment Managers managing director and head of distribution for Australia and New Zealand noted the outlook from investors in the Asia-Pacific region was more positive than their global counterparts.
“Only half of global institutional investors said policy makers had been effective in responding to the pandemic, whereas in Asia, 71 per cent said policy makers had responded well,” Ms Watson said.
“Long-term return assumptions of 7.6 per cent per annum from investors in Asia were also significantly higher than the 6.3 per cent their global investors predict.”
On the other hand, 80 per cent of investors in Asia agreed the market is underestimating the long-term impact of COVID and the current level of growth in equity markets is unsustainable. The majority (85 per cent) said current valuations do not reflect company fundamentals.
Ms Watson added investors in the region have placed strong emphasis on ESG factors, with 74 per cent saying it is integral to sound investing, while 65 per cent said there was alpha to be found in ESG.
Around 60 per cent of investors in the Asia-Pacific region said ESG funds would outperform in 2021, compared to 53 per cent globally.
“When it came to active compared with passive investment, 67 per cent of institutional investors in Asia agreed that active investment will outperform passive investment going forward and 82 per cent said large flows into index funds exacerbate market volatility,” Ms Watson said.
