Eight out of 10 institutional investors say markets have underestimated the long-term impact of the COVID-19 pandemic and only one in five expect a full economic recovery before 2022, according to a survey.
Natixis Investment Managers conducted the survey of over 500 institutional investors globally, which also found 53% expect defensive portfolios to outperform in 2021, with 58% expecting value to outperform growth and 53% expecting large caps to outperform small caps.
Over half (52%) also expected emerging markets to outperform developed markets, even though 86% agreed on the need to be more selective in pursuing emerging market opportunities.
Corrections were expected for the stockmarket (44%), real estate sector (41%), tech sector (39%) and bond markets (29%).
Just over 80% said that equity factor diversification was an important consideration, while 71% said they were willing to underperform their peers to ensure downside protection.
Around 78% believed the outcome of political elections had less impact on the market than central bank policy, while 78% also trusted that central banks would backstop the markets in the event of another serious downturn.
Many believed that policy decisions including rate cuts and fiscal stimulus would lead to tax increases (65%), had increased risk of a financial crisis (53%) and decreased governments’ capacity to respond to future crises (52%).
Negative interest rates were the biggest portfolio risk concerns (53%), while 82% said low rates had distorted market valuations.
Damon Hambly, Natixis Investment Managers Australia chief executive, said institutional investors had a lot to deal with as they were confronted with a global pandemic, a tumultuous US Presidential election, and trade wars between China and the US.
“Even as the hope of a vaccine becomes a reality, 80% of institutional investors don’t expect GDP growth to recover to prior levels until at least 2022, and the same percentage believe the market is underestimating the long-term economic impact of COVID-19,” Hambly said.
“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.
“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 to 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.”
Louise Watson, Natixis Investment Managers managing director and head of distribution for Australia and New Zealand, said the outlook from institutional investors in Asia, including Australia, was more positive than globally on some measures.
“Only half of global institutional investors said policy makers had been effective in responding to the pandemic, whereas in Asia 71% said policy makers had responded well,” Watson said.