Economic Policy

The 7 Issues That Will Guide Institutional Investors Through 2021

Through the greater part of 2020, investors faced the unprecedented challenges of a global pandemic that caused the largest market selloff in recorded history, a US presidential election that bore signs of a breakdown of the democratic process, and unstable political and economic conditions in both developed and emerging economies. Most investors are discovering that 2021 is no less challenging.

A recent study from Natixis Investment Managers, which has more than US$1.3 trillion in assets under management, reveals that almost three-fourths of all professional investors do not expect the world to return to pre-pandemic conditions, even if health authorities are able to eliminate the COVIC-19 virus. Those investors expect continued reduced returns everywhere except Asia, increased volatility in the stock, bond, and currency markets, and an increased focus on the defensive, over aggressive investment positions.

Beyond these expectations, institutional investors have identified seven key issues that will drive their investment strategies through the remainder of 2021, and that will be the foundation of their strategies to navigate the risks and uncertainties that characterized the markets and the global economy for much of the past eighteen months.

The global economy will not recover from COVID-19 until after 2021

Up to a fourth of all professional investors do not anticipate a full recovery to pre-COVID levels until 2023, and almost 10% do not expect that recovery until 2024. Most are looking for traditional signs of a recovery, including consistently improved consumer spending, new expenditures by businesses, and improved productivity before they will be confident that the turmoil of the past 18 months has ended.

In the investment arena, almost 80% of professional investors expect a significant correction in the equity markets before year-end. That correction is also expected to affect cryptocurrency and real estate markets, both of which are perceived as being overvalued. Within equities, the technology sector has benefited from the pandemic, but many institutions expect that sector to experience an even greater correction as the global economy returns to whatever may be considered to be normal.

Policy will play a greater role than politics

The U.S. presidential elections, unrest in Hong Kong, and other global political events dominated the headlines through 2020 and into 2021, but institutional investors are placing precedence on the effects of government policy over geopolitics to guide their investment decisions. The most significant policy decision that will impact investment markets is the more than US$12 trillion in stimulus spending that governments injected into the global economy. Some institutions see interest rate cuts and additional stimulus spending on the horizon, all of which might trigger bouts of inflation and market volatility.

Markets will reward wealth managers that maintain an active role in portfolio management

To achieve the highest returns through the rest of 2021, financial professionals need to remain hypervigilant to negative interest rates, market volatility, credit crunches that can affect either or both businesses and individuals, limitations on portfolio liquidity, and inflation risks. Most wealth managers factor these and other common risks into their investment strategies, but the economic uncertainties that were hatched in 2020 place a greater emphasis on these factors and may require institutional investors to restructure asset allocations more frequently in order to achieve a target rate of return.

The potential for a correction remains, but the tech and health care sectors will remain strong

The tech and health care sectors experienced strong gains through the 2020lockdown as quarantined consumers relied on technology to stay connected with peers and on health and medical services to survive the COVID-19 virus. If employers continue to allow workers to telecommute, manufacturers of consumer staples will also reflect continued growth.

On the downside, commercial real estate, utilities, and providers of industrial materials are seen as delivering weaker results. Demand for energy has also remained depressed with fewer employers commuting to offices and other workplaces.

Tactics for allocating assets will change

Institutional investors are concerned with high valuations in the U.S. equity markets and are trimming U.S. investments. Markets in Asia, Europe, and emerging economies are likely to benefit from this re-allocation.

The massive infusion of government stimulus spending into global economies has created a real risk of negative interest rates, and that risk is driving investment assets out of government debt and into investment-grade corporate bonds, securitized debt, and high-yield and emerging market bonds. Institutional investment managers are also looking for higher yields and returns from alternative investment products such as private debt and infrastructure investments.

Institutional Investors will play a larger role in the private investment market

Private investments have long been the province of venture capital funds and specialized merchant banks that provide seed capital to high-risk startups and entrepreneurial ventures. Institutional investors that previously shunned those opportunities due to asset restrictions and other limitations will pay greater attention to private equity funds, secondary and derivative assets, distressed debt, and other non-traditional investment alternatives.

Institutional investors will make decisions on the basis of predictions of future trends

The fact that virtually nobody predicted the global upheavals of the past 18 months has not stopped institutional investors from making predictions about the course of global economic and political events. The predictions that will drive their investment decisions include:

  • Active investment strategies will outperform passive plans
  • The global economy will not fully recover or escape the consequences of COVID-19
  • Funds that focus on environmental, social, and governance issues will deliver improved returns
  • Value stocks will outperform growth stocks
  • The big tech components of the tech sector will continue to grow despite efforts to break them up
  • Geopolitical tensions will increase, with a corresponding decrease in democratic establishments
  • Social unrest will increase in both developed and emerging economies

The clearest conclusions that institutional investors might draw for the remainder of 2021 will inevitably reflect an uncertain mix of challenges and opportunities. Even with market indexes achieving new records every week, institutional investors will remain cautious of jumping into what may well be an overheated or unbalanced global market. In sum, the global economy will be fragile for at least another 12 to 24 months, during which time expectations and results will change more often than ever.

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