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Natixis 2018 Outlook: More Volatility, Bubbles to Haunt Investors

Natixis 2018 Outlook: More Volatility, Bubbles to Haunt Investors

Wednesday, 06 December 2017 03:25 PM

Institutional investors are wary of fragile market conditions, distorted asset prices and systemic risks caused by central bank interventions and the growing popularity of passive investments, but they are confident their own portfolios can weather the storm with only modest changes, according to new survey findings released by Natixis Investment Managers.

Natixis Investment Managers’ Center for Investor Insight surveyed 500 institutional investors around the world who manage more than $19 trillion of assets for retirees, governments, insurance companies and other institutions.

The survey found that 77% of respondents worry the prolonged period of low interest rates has created asset bubbles.

Six in 10 (59%) say the absence of volatility is a major investor concern, and 59% believe that volatility has been artificially suppressed by flows into passive investment strategies.

More than half (56%) believe the increase in passive investing is distorting relative stock prices and creating systemic market risks (63%), which 72% believe individual investors aren’t yet aware of.

“Investors are facing unprecedented challenges as central banks unwind the easy money policies that have dominated the markets since the financial crisis and prepare for the first challenging bond market in more than a generation,” said David Giunta, CEO for the US and Canada at Natixis Investment Managers.

“As they plot their course, the majority of institutions tell us active management offers the most promising way to achieve key objectives in markets like these, such as providing downside protection, gaining exposure to non-correlated asset classes, taking advantage of short-term market movements and ultimately delivering better risk-adjusted returns.”

Natixis’ surveys show that institutional investors have increased allocations to actively managed investments since 2015, now reaching over two-thirds of their overall portfolio (68%).

Meanwhile, allocations to passively managed funds have declined from 36% in 2015 to 32% currently.

According to the survey, key institutional investor expectations for 2018 include:

  • Active management continues to gain favor: Three-quarters of institutions overall (76%) agree the current market environment is likely to be favorable for active investment management in 2018, including 78% of pension funds and 79% of foundation and endowment managers. Looking for growth, institutional investors said they find active management is better suited to access emerging market opportunities (75%), provide exposure to non-correlated assets (74%) and implement ESG strategies (68%). Nearly three-quarters (73%) say active management is also better at providing downside protection than passive strategies.
  • More volatility: Seventy-two percent of institutional investors say they are surprised volatility has been so low for so long, and most don’t think the trend will continue into 2018. Seventy-eight percent expect the stock market will be more volatile and 70% think the bond market will be more volatile next year.
  • Not so tiny bubbles: Investors’ reach for riskier assets in pursuit of higher yields has been a positive feedback loop, crowding investors into assets that many believe have become bubbles. Thirty percent of institutions think there is a stock market bubble, and 42%, including 60% in the UK, think there is a bubble in the bond market. Nearly two-thirds (64%) of institutional investors think bitcoin, the largest of the emerging cryptocurrencies, is a bubble – and the currency has appreciated more than 56% to over $10,000 in the month since the survey was conducted. Seven in ten (71%) say both institutional and individual investors are taking on too much risk in the pursuit of yield.
  • Return of alpha: Sixty-nine percent of investors think stock correlations will remain at the same level or increase further in the year ahead, and 76% say alpha has been harder to come by as the markets have become more efficient. However, nearly half (46%) expect greater dispersion, or the spread between security prices, to increase in 2018. Seven in ten institutional investors (69%) say active management allows them to take advantage of short-term market movements.
  • Sector picks: More institutions (45%) expect the technology sector to outperform the market in 2018 above any other sector, followed by healthcare (44%), defense/aerospace (43%) and financials (41%).
  • Threats to investment performance: Investors see geopolitical events, such as tension with North Korea and instability in the European Union, as the biggest potential threat to the markets. Seventy-four percent of institutions say it would negatively affect investment performance, followed by impact of asset bubbles (65%), rising interest rates (61%), low yields (54%) and unwinding of quantitative easing (53%).

Portfolio Moves

Institutional managers are making tactical asset allocation moves and a more strategic shift in their approach to portfolio construction. Their top three portfolio risk concerns going into 2018 are interest rates (62%), asset price volatility spikes (53%) and liquidity (32%). Only 43% believe diversification across traditional stocks and bonds can provide adequate downside protection, and 64% say fixed income no longer provides its traditional risk management role in their portfolios.

On average, institutional portfolios are currently allocating to stocks (37%), bonds (34%), alternatives (21%) and 5% in cash. Over 90% are geographically diversified, with equity holdings across international developed and emerging markets. Next year, they will make the following allocation adjustments:

  • Equities: Decrease exposure to US stocks; increase allocations to equities in Europe and emerging markets. Nearly half (46%) think Asia-Pacific offers the best of the emerging market investment opportunities.
  • Fixed Income: Decrease exposure to high yield bonds and government debt; increase exposure to emerging market debt.
  • Alternatives: The biggest moves in the year ahead are increased allocations to non-traditional assets, including private equity, private debt, real estate and infrastructure.

Meanwhile, Goldman Sachs Group Inc. is doubling down on the global economy in its 2018 outlook.

“Late-cycle optimism” is the chief theme underpinning the bank’s seven top trade theses, as outlined in a note Thursday by Francesco Garzarelli, co-head of global macro and markets.

Goldman’s stance is far from “America First.” In risk assets, its strategists favor emerging markets; in foreign exchange, commodity-linked currencies and the euro are preferred, Bloomberg reported.

By contrast, last year’s trade ideas were dominated by worries about the potential of newly elected U.S. President Donald Trump to disrupt global commerce.

(Newsmax wire services contributed to this report).

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Natixis’ surveys show that institutional investors have increased allocations to actively managed investments since 2015, now reaching over two-thirds of their overall portfolio (68%).
natixis, outlook, volatility, bubbles, investors
Wednesday, 06 December 2017 03:25 PM
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