Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
Despite authorities taking their foot off the environmental, social and governance pedal and recent volatility in equities and bonds, the benefits of Artificial Intelligence and improved investor transparency are just beginning.
Local instos fret geopolitics, hunt for deals
Local institutional investors are concerned about the influence of bad geopolitical actors but are more optimistic about inflation than their global counterparts, according to the findings of Natixis IM’s 2024 Institutional Outlook report.
“Confronted with global conflicts, high inflation, and continual rate rises this year, Australian institutional investors have had a lot to deal with – unfortunately it looks like 2024 will also be filled with challenges,” said Louise Watson, Natixis country head for Australia and New Zealand. “Geopolitical forces and macro-economic uncertainty remain a concern for markets globally and the need to build resilient and diverse portfolios continues to be of critical importance for institutional investors.”
Natixis surveyed 500 institutional investors across 27 countries for the report. More than half of Australian respondents expect local inflation to moderate compared to 40 per cent globally, but they’re also more pessimistic about a recession – with just under half believing one is “inevitable” in 2024.
“The uncertainty of the economic picture factors heavily in institutional investors’ market outlooks for 2024,” the report says. “Almost six in ten (59 per cent) are projecting higher levels of volatility for equity markets, while 39 per cent see a similar uptick in volatility for bonds, with concern that slowing growth coupled with higher rates will lead to an increase in corporate defaults (76 per cent).”
Australian institutions are bullish on just two asset classes: bonds (69 per cent) and private debt (73 per cent), which aligned with sentiment globally. Private asset are still a top alternative allocation choice, with 66 per cent saying there is still a “significant delta” between private and public assets. But the popularity of private assets is making it hard to find deals.
“With this in mind, teams are building more safeguards into their strategy and 72 per cent say they have stepped up their due diligence to respond to concerns around deal quality,” the report says. “In addition to this, regulation is influencing views on private assets. More than half of those surveyed (53 per cent)globally say over-regulation of private markets is making them less attractive. However, based on their plans for 2024, it appears this is about easing up future allocations rather than dialling back on what they already own.”
And big institutions are approaching markets with an active mindset, with two thirds of assets allocated to active strategies – no change from last year.
“Looking ahead, there is little variance to the plan as institutions project they will have 66% invested in active over the next three years,” the report says. “The strategy worked well in 2023, with 66 per cent of institutional investors reporting that the active investments in their portfolios outperformed their passive investments. What’s more, almost six in ten (59 per cent) believe that the popularity of passive investments increases systematic risk.”
