Institutional investors facing inflation risk, ESG opportunities in 2021

While institutional investors are facing headwinds from unexpected inflation and geopolitical realignment in 2021, the coming year will also see rebounds for corporate earnings and equities, according to two new research papers from Mercer.

“Non-stop social and technological change has increased at a rate as exciting as it’s bewildering and COVID-19 has resulted in an acceleration within that acceleration,” said Deb Clarke, global head of investment research at Mercer, in a press release. “The pandemic has expedited significant changes in pre-existing trends, some of which we believe may recede somewhat as the public health threat diminishes due to factors such as mass vaccinations, but we think that others such as online retailing and sustainability are here to stay. It pays to be aware of these and invest accordingly.”

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The papers found inflation risks are on the rise as global allegiances and working relationships are being recast (exemplified by Brexit and tensions between the U.S. and China) and fiscal institutions pilot new techniques to ensure economic stability.

While businesses and credit markets settle into a new post-coronavirus pandemic normal, the papers said there will be investment opportunities in private credit, including restructuring finance and distressed debt, while unconstrained managers in public markets may also find yield pickups from assets subject to ratings downgrades from investment grade.

Environmental, social and governance principles will continue to be prominent in 2021, as institutional investors consider climate-transition plans as a way of mitigating risk in their portfolios. And while global economic growth decreased by 30 per cent in 2020, it’s expected to make up lost ground in the coming year as coronavirus vaccines become more widely available.

“The human and economic cost of COVID-19 has been enormous,” said Rupert Watson, head of asset allocation at Mercer, in the release. “That said, from an economic standpoint, the crisis has led to new and innovative businesses and to the evolution of existing businesses. We have seen big winners and some losers along the way. When the economy returns to where it was prior to the pandemic, its composition will look different thanks to changes to working practices and the use of technology.”

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