Natixis IM poll reveals asset classes expected to bring returns in tough conditions
With 2024 likely to bring a continuation of this year’s challenging market conditions, Canada’s largest investors have been sharing their focus areas in a new survey from Natixis Investment Managers.
Canadian institutional investors managing $2.4 trillion in assets are among the participants in the global poll of public and private pensions, insurers, foundations, endowments, and sovereign wealth funds around the world.
It revealed three key areas of bullishness - bonds, private equity, and private debt - amid expectation of rate cuts by around half of respondents, mostly likely to begin mid-year, while a similar share believe the economy is on the verge of recession (rising to 62% in North America).
Three quarters of those who think recession is likely say it could be painful or very painful, however the percentage of respondents who do not think a recession is likely has more than doubled to 37% compared to 15% last year.
On rate cuts, 40% of Canadian poll participants expect cuts in 2024, but 61% globally think rates will be higher for longer.
“The markets have demonstrated tremendous resilience in absorbing a sharp rise in rates, inflation, and two wars so far in 2023,” said Liana Magner, EVP and head of retirement and institutional for Natixis IM in the US. “While institutional investors anticipate plenty of headwinds in the year ahead, few are lowering their assumed rate of return for 2024, and long-term return expectations remain solidly at 8% on average.”
China is expected to see a slowdown in 2024 and more than half of Canadian institutional investors and 40% globally are actively divesting China holdings while six in ten think India could replace China as the world’s top emerging market.
Geopolitics in focus
Geopolitical tension will continue to be a key factor in the year ahead.
More than half of institutions predict that the outcome of the 2024 US elections will be more relevant to global markets than in previous years and the influence of geopolitical bad actors is cited as the
biggest threat to the economy (49%), slightly ahead of a pullback in consumer spending (48%) and central bank policy error (42%).
Seven in ten respondents think a growing alliance between Russia, North Korea, and Iran will lead to greater economic instability, while China’s geopolitical ambitions will create an east-west split in the global economy.
Portfolio picks
De-risking is a priority for 56% of respondents for 2024.
Most believe that bonds will perform well in the year ahead with longer durations most favoured. Higher rates and slowing growth create risk of corporate defaults so higher quality bonds are important.
Investors are most bullish on private equity (60%) and private debt (64%), with 66% saying
there is still a significant delta between private and private assets. They see the best opportunities for private investments in data centres (52%) and housing including senior/assisted living (40%), affordable housing (26%), and student housing (24%).
For equities, large cap remain favoured and international markets are expected to outperform the U.S. (although 65% of U.S. respondents are most confident in their domestic market). Tech, energy, and health care are seen as outperforming sectors.
Active management is in focus for 2024 with volatility expected.
“Macroeconomic and market uncertainty complicate the outlook for 2024, and not knowing what will happen next can contribute to higher levels of market volatility,” said Dave Goodsell, head of the Natixis Center for Investor Insights. “The portfolio is where it comes into focus, and most institutional investors tell us have shored up their portfolios for known risks.”
Artificial intelligence
The poll also asked investors about AI and how they think it will impact investing:
- 75% of institutional investors think AI will unlock new investment opportunities and 63% think it will uncover portfolio risks that were otherwise undetectable.
- 66% see the race for AI supremacy as the new space race and one that will supercharge growth in the tech sector.
- Half (50%) believe AI could be a bigger investment opportunity than the Internet was, and for now, few (35%) are worried about AI being a bubble.
