A survey of investment professionals suggests the downturn could be more prolonged than the markets are anticipating
Will there be a recession in Canada? If so, how deep and how long?
These questions have yet to be given clear answers, although the likelihood of a downturn remains strong, even if it’s profile is less certain.
According to a recent survey of investment professionals across North America, the wider region is either in a recession already or will be at some point in 2023 (85% believe so).
The Natixis Investment Managers’ poll reveals that more than half of respondents think the markets are underestimating how long the recession will last,
Most also said that a central bank policy error is the biggest threat to Canadian and US economies.
Interest rates are another uncertainty, with participants not convinced that the Fed and BoC will pause (28%), while 52% expect rates to continue rising this year and 20% thinking they will fall.
Given the impact of rates, most respondents said that they expect stock market volatility this year to be as volatile (34%) or more volatile (47%) than 2022.
On the performance of equities, almost three quarters of respondents are either maintaining (45%) their average 8% return assumptions for client portfolios this year or plan to adjust return assumptions even higher (28%).
“Investment performance is once again a differentiator,” said Dave Goodsell, head of the Natixis Center for Investor Research. “Ten-plus years of historically low rates accommodated a long bull market run that sent stock prices soaring and made almost any investor look like a genius. Simple, low-cost, passively-managed index funds generated big returns from high-flying, large-cap growth stocks. Last year’s steep losses was a hard lesson for millions of investors who discovered the hidden dangers of relying too much on passive investing.”
Slightly more than half of respondents think the recession will expose the inadequacies of passive investing, which 51% believe has distorted relative stock prices and risk-return trade-offs, and 64% say contributes to bigger market swings when there are large flows into and out of passive investments.
Fund selectors remain bullish on stocks and 48% will increase allocations to US equities this year with expectation that energy, financial and healthcare sectors are most likely to outperform.
They expect the tech sector to stabilize, with more predicting information technology to outperform (39%) than underperform (33%) the market this year.
Fund selectors are expecting more of a stock-pickers market with active investments outperforming and say that the conditions are right for active managers to capture the upside of market dislocations and mis-priced or undervalued securities.
Selectors’ top portfolio risk concerns are inflation (70%), interest rates (63%) and volatility (49%) and this will require frequent re-balancing.
Traditional fixed-income is expected to see a resurgence amid rising rates, and most will increase allocations to bonds of all types but especially government and corporate.
Alternatives will also be an important part of the mix with fund selectors mostly adding infrastructure investments (46%) private equity (46%) and private debt (39%).
Investment professionals also indicated that they will fine-tune their firm’s product offering this year.
More than half will boost the number of actively managed funds on their platform, and on average 60% of the funds they offer now are actively managed.
Other plans include adding private assets (52%), sustainable investment options (48%), hedge funds (33%) and thematic investments (36%) to capitalize on innovation opportunities and demographic trends.
Enhanced model portfolio offerings are also in focus. Respondents said that model portfolios help to streamline the investment management process (86%), enable advisors to spend more time addressing clients’ needs (82%), and help to ensure a consistent investment experience for clients (77%) while managing risk exposure for the firm (78%).
They also agree that heightened market volatility is accelerating advisors’ use of model portfolios (65%) and that models enhance the alpha potential for their clients (62%).
On the global picture, 66% of fund selectors in North America and 69% globally think the global economy is moving toward two separate spheres of economic activity.