Evening Brief – 12.11.23
Bullish Bonds, PE, Private Debt
Institutional investors remain bullish on bonds, private equity, and private debt despite a shift to de-risking amid widespread predictions of a 2024 recession, according to a survey by Natixis Investment Management.
More than two-thirds (69%) are bullish on bonds, with 62% calling for longer-duration paper to outperform short duration. Corporate allocations emphasize quality, with 76% expecting higher rates and slower growth to lead to a rise in corporate defaults.
Private equity and private debt are expected to provide strong opportunities in 2024, with investors citing a “significant delta” available by focusing on private assets.
Real assets such as data centers and housing, including senior/ assisted living, affordable housing and student housing, were also mentioned as good opportunities amid the challenging macroeconomic environment, with bonds serving as the main haven.
Natixis IM polled 500 institutional investors worldwide who oversee $23.2 trillion in assets for public and private pensions, insurance, foundations, endowments, and sovereign wealth funds. Survey participants also include 92 institutional investors in the US who are responsible for the management of $4.4 trillion in assets.
While views on the stock market were divided between bulls (46%) and bears (54%), investors generally think that the promise of artificial intelligence will continue to drive outperformance in the technology sector. However, 56% of institutional investors are actively de-risking their portfolios as we approach 2024, according to the report.
The influence of geopolitics and a downturn in consumer spending are the two main challenges to investors’ economic projection.
Just over half (51%) believe a recession is unavoidable, with the U.S. at 62% and the U.K. at 67%. And 74% of those who expect a recession believe it will be “painful or very painful.”
The percentage of institutions that do not anticipate a recession has more than doubled to 37% from 15% a year earlier, according to Natixis.
Meanwhile, 60% of institutions believe higher inflation is the new normal. Furthermore, 61% expect rates to remain higher for longer, while 51%, including 55% in the US, anticipate rate cuts in 2024, beginning in the second (32%) or third (38%) quarter.
“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 they’ve shored up their portfolios for known risks.”
Most institutional investors (59%) anticipate an increase in stock market volatility, and 41% anticipate more return dispersion. This is most like one of the reasons why nearly 70% of institutional investors believe active management will outperform again in 2024.