Full economic recovery in 2021? Unlikely say institutional investors

Survey reveals belief that the markets are underestimating the impact of the pandemic

Full economic recovery in 2021? Unlikely say institutional investors
Steve Randall

As Canadians slept, there was a milestone moment taking place across the Atlantic as 90-year-old British grandmother Margaret Keenan became the first western recipient of a licensed COVID-19 vaccine.

But while the start of a huge vaccination program worldwide begins the return journey to normal life, the economy may take some time to do the same.

According to some of the world’s largest institutional investors, we should not be expecting full economic recovery in 2021.

In fact, 73% believe the “new normal” is here to stay with 44% not expecting GDP growth to return to its pre-Covid pace until at least 2022 and 35% not expecting full economic recovery until 2023 or later.

With a combined US$13.5 trillion in assets, the 500 institutions surveyed by Natixis Investment Managers are positioning portfolios for defence in 2021.

That’s because almost 8 in 10 believe that the current stock market pace cannot be sustained and are readying for performance to be hard-won and fragile in the year ahead.

Despite their caution, the firms that manage assets for pensions, insurers, sovereign wealth funds, foundations and endowments globally, also see alpha opportunities amid rising volatility and a market that will grind forward slowly.

And two thirds of respondents intend to maintain or raise their return assumptions. Long-term return assumptions were down slightly on average at 6.3% with insurers posting the largest drop (from 6.5% to 5.5% on average).

The largest share of respondents expect that value will outperform growth; large-cap will outperform small-cap; emerging markets will outperform developed markets (although greater selectivity is needed); and big tech to remain dominant.

Asked about the chance of correction in 2021, 44% believe it is due in the stock market, 41% in real estate, 39% tech sector, and 29% bond market.

Equity factor diversification is seen as important to manage the risks.

Broad portfolios, active management

Most institutional investors plan to maintain their broad range portfolios, allocating 40% to bonds, 36% to stocks, 17% to alternatives, and 6% to cash.

They will also make some tactical moves:

  • Trim US equities and increase exposure to European, emerging market and Asia Pacific stocks.
  • Decrease exposure to government bonds and add investment grade corporate debt and securitized loans.
  • Broaden alternative strategies to include greater use of private equity and infrastructure investments.

Overall, two-thirds (69%) of institutional investors say private assets will play a more prominent role in their portfolio strategy going forward.

“With the pandemic, politics and global economies at an inflection point, institutional investors are positioning their portfolios to navigate short-term volatility while anticipating the long-term impacts of this year’s massive economic and market interventions,” said David Giunta, CEO for the US at Natixis Investment Managers.

Too much risk

Asked about the biggest potential risk in 2021, negative interest rates was the top answer, citing low rates for distorting market valuations.

Seven in ten respondents believe investors are taking too much risk.

“Investors’ cautious outlook reflects deep concerns about the lasting consequences of the extreme measures needed to cushion the financial blow of the pandemic. However, they also see opportunities to find value through active management, thoughtful portfolio allocation and diversification,” added Giunta.