Natixis: Institutional investors expect global financial crisis in next five years

Global institutional investors are concerned about rising public debt levels and low economic growth as they look ahead at the macro-economic themes set to shape investment trends in 2020, reveals Natixis Investment Managers’ global survey of 500 institutional investors.

As public debt levels continue to hit new records, a large majority (89%) 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%) respondents expecting a downturn within the next five years and 58% even sooner, between one and three years.

Andrew Benton, head of Northern Europe at Natixis, said: “The last 12 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, he said, 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.

Foreign interference in elections among key volatility drivers

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. Some 69% of respondents agreed that foreign interference in elections is becoming an increasing problem globally, while 64% said the US presidential election campaign is likely to be a major source of market volatility, the study showed.

As the macro economic environment remains filled with complexity, expectations for increased volatility are on the up. The research revealed that more than half (52%) of institutional investors expect currency volatility to rise in 2020, while over three quarters (77%) expect rising equity market volatility and 62% 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% of respondents), but perennially low interest rates (50%) finish a close second. Respondents also worry about the impact of a credit crunch (37%) and liquidity issues (35%), while one in five are on the watch for deflation.

With volatility rising and rates challenging, about half of researched institutions (46%) believe dispersion will also be up. The resulting increased spread between security prices, maybe one reason why 75% of institutional investors said today’s markets favour active management. This should be welcome news to the 71% who find it harder to generate alpha as markets become more efficient.

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

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.

More than half of investors (56%) believe negative yielding bonds will increase in 2020, with 54% 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, the survey showed that investors believe private assets are better suited than traditional assets for two critical portfolio functions: delivering diversification (62%) and generating more attractive returns (61%).

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

Benton said that 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 10 (68%) say private investment will play a more permanent role in portfolios going forward.

“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,” Benton said.