About half (51 per cent) of global institutional investors believe a recession is inevitable, a sentiment that runs strongest in the U.K. (67 per cent) and North America (62 per cent), according to Natixis Investment Managers’ 2024 outlook survey.
The survey, which polled 500 institutional investors in 27 countries, also found among those expecting a recession, three-quarters (74 per cent) said they expect it to be painful or very painful. However, the percentage of respondents that no longer see recession anywhere on the horizon has more than doubled — from 15 per cent a year ago to 37 per cent this year.
While 60 per cent of institutional investors agreed higher inflation is the new normal, 61 per cent said they expect rates to remain higher for longer, though 51 per cent — including 40 per cent in Canada — said they expect rate cuts in 2024, which most anticipate starting in the second (32 per cent) or third (38 per cent) quarter.
Read: Survey finds 77% of U.S. institutional investors worried about inflation and interest rates in 2024
“The markets have demonstrated tremendous resilience in absorbing a sharp rise in rates, inflation and two wars so far in 2023,” said Liana Magner, Natixis’ executive vice-president and head of retirement and institutional for Natixis in the U.S., in a press release. “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 eight per cent on average.”
The geopolitical landscape is one of the biggest concerns for institutional investors in 2024. Across all global respondents, about half (49 per cent) said they see the influence of geopolitical bad actors as the biggest threat to the economy, followed directly by a pullback in consumer spending (48 per cent) and central bank policy error (42 per cent).
Institutional investors are considering multiple geopolitical risk factors, including: a growing alliance between Iran, North Korea and Russia leading to greater economic instability (70 per cent); China’s geopolitical ambitions splitting the global economy into two spheres — East and West (64 per cent); and increasing fragmentation between the West and the emerging national economics of Brazil, China, India, Russia and South Africa (73 per cent).
Looking specifically at China, 40 per cent of all survey respondents — including 54 per cent in Canada and 52 per cent in Asia — said they’re actively divesting holdings in the country with most noting they believe China’s geopolitical ambitions (73 per cent) and regulatory uncertainties (79 per cent) have made it a less attractive investment opportunity.
In addition, 63 per cent of respondents said they believe emerging markets have been overly dependent on China and 70 per cent agreed consciously divesting from China presents an opportunity for new emerging markets to climb the global ladder. Indeed, 59 per cent of all respondents predicted India will surpass China as the top emerging market for investment.
The survey also found around half (54 per cent) of institutional investors said they expect the outcome of the 2024 U.S. election will be more relevant to global markets than in previous years. While 52 per cent of respondents agreed the election results will be mostly noise for the markets and less important than U.S. Federal Reserve policy (61 per cent), most said they think a messy election campaign will lead to increased market volatility (72 per cent) and partisan divide will negatively impact global markets (71 per cent).
Read: What U.S. election uncertainty means for institutional investors
Heading into 2024, more than half (56 per cent) of all respondents said they’re actively de-risking their portfolios. More than two-thirds (69 per cent) said they’re bullish on the performance of bonds with 62 per cent calling for longer-duration bonds to outperform short ones.
As well, most institutional investors continue to be bullish on private equity (60 per cent) and private debt (64 per cent), with two-thirds (66 per cent) saying there’s still a significant delta between public and private assets. In private investments, respondents saw the most opportunities in data centres (52 per cent) and housing, including senior/assisted living (40 per cent), affordable housing (26 per cent) and student housing (24 per cent).
In public equities, about half (52 per cent) of respondents said they expect the information technology sector to outperform the stock market, as it did in 2023. Many also said they expect outperformance by the energy (49 per cent) and health-care (48 per cent) sectors.
Read: 2023 Risk Management Conference: How UPP is focusing on active investing in its climate action plan
The survey also found more than half (59 per cent) of institutional investors are forecasting an uptick in stock market volatility and 41 per cent said they expect a higher level of dispersion in returns. This is likely a key reason why 68 per cent of respondents predicted active management will again outperform in 2024.
With the mainstream application of artificial intelligence growing into one of the hottest investment themes, institutional investors are finding both good and bad in its rapid progression. Three-quarters (75 per cent) of survey respondents said they believe AI will unlock new investment opportunities and 63 per cent said they think it will uncover portfolio risks that were otherwise undetectable.
Half (50 per cent) said they believe AI could be a bigger investment opportunity than the internet was in its early days and, for now, just a third (35 per cent) said they’re worried about AI being a bubble. A majority (81 per cent) of respondents said they think it will be difficult for any country to effectively regulate AI. And while most aren’t worried, 39 per cent said they think the downside risks of AI outweigh the opportunity it presents.
Read: Caisse investing in artificial intelligence, OMERS backing property services firm