Could a rough road ahead in 2021 help active managers?
BY Alison MacAlpine | December 10, 2020
What do global institutional investors expect in the coming year? It’s not a rosy picture.
According to Natixis Investment Managers’ 2021 Institutional Investment Outlook, just 12 per cent of institutional investors surveyed said they believe global gross domestic product will bounce back to pre-pandemic levels by the end of 2021.
Meanwhile, 79 per cent said they think markets are underestimating COVID-19’s long-term impact on the economy, and 95 per cent think there’s potential for a market correction next year.
However, that pessimism won’t necessarily be bad for investment markets.
“When everybody’s on the same page, everybody’s optimistic, everybody’s bullish . . . that’s when I start to get a little worried because at that point maybe the marginal dollars [are] already in the market,” said Jack Janasiewicz, senior vice-president and portfolio manager and portfolio strategist at Natixis, in a webinar to review the survey findings on Tuesday. “But when people are sitting back, expecting corrections, a little bit concerned, a little bit hesitant, to me that’s a good sign because that means there’s still money that can come in and risk appetite can still grind higher. I think that’s a net positive.”
Respondents also predicted 2021 will favour value investments (58 per cent) over growth (42 per cent), and by an even larger margin active investment strategies (79 per cent) over passive (21 per cent). There was an almost even split between those thinking outperformance will come from defensive portfolios (53 per cent) versus aggressive portfolios (47 per cent).
“We’ve seen growth outperform value for a number of years, and we’ve seen that go almost to an extreme throughout the crisis—obviously with technology and health care and communication services mainly proving defensive [with] earnings proving resilient,” said Etsy Dwek, head of global market strategy at Natixis Investment Manager Solutions. “[But now] we’ve started to see a rotation already . . . whether you want to call it the reopening trade, the catch-up trade, the value trade [or] the cyclicals trade.”
A rotation to value and an expectation of more disparate returns are better for active management, she added. Run-ups in valuation of some stocks also make active management more sought-after as it can choose the investments that still have sound fundamentals and intrinsic value.
The portfolio risk the largest number of respondents (53 per cent) noted concern about in the coming year is negative interest rates, unsurprising given the acute effect these rates can have on pension plans’ ability to accommodate plan liabilities and regulatory constraints.
“The negative rate story is very important,” said Janasiewicz. “It’s forcing investors to have to look for returns in other areas . . . Someone who might traditionally be investing in investment-grade [fixed income], if you’re getting a zero real return, you might have to now focus on extending a little farther on the risk spectrum. So, you’re buying emerging market debt, or high-yield, or maybe now you’re going into the equity space.”
Not only could negative rates push investors into areas of the market they’d prefer not to be in, the knock-on effect may be higher equity multiples, he suggested.
Further, Janasiewicz said, as more investors shift more heavily to equities for lack of alternatives, the market may become more volatile—the portfolio risk concerning the second-largest number of respondents (52 per cent).
The survey found institutional investors aren’t planning major asset allocation moves for the coming year, with just a slight inclination towards upping exposure to equities and alternatives. Within equities, respondents planned to trim U.S. holdings in favour of Asia-Pacific, European and emerging market stocks. For fixed-income, in response to low interest rates, portfolios will likely see higher allocations to investment-grade and high-yield corporate bonds, as well as securitized debt. As for alternatives, investors are hunting for yield, hoping to potentially find it by increasing allocations to private debt, gold and other precious metals, as well as absolute return strategies.