Allocators Are Focusing on These Asset Classes

A new survey by Natixis finds institutional investors are remarkably optimistic in spite of the macro environment.

Illustration by II

Illustration by II

Despite a worsening economy, inflation, and the threat of deflation, allocators are expecting robust returns for 2023.

In a report released by Natixis on Wednesday, 77 percent of the 500 allocators surveyed said they would either maintain or raise their current average return assumption of 7.9 percent. Firms focused on fixed-income strategies were especially optimistic, with 46 percent of insurers planning to increase their projections from an average of 6.7 percent.

The findings come amid an economy that has changed dramatically over the past year, according to Natixis, which also listed the top economic challenges facing investors in the new year. Fifty-seven percent of participants saw war as their biggest threat, followed by 53 percent on potential central bank policy errors. The third biggest concern, at 40 percent, was geopolitical tension between the U.S. and China. The allocators surveyed had a combined $20.1 trillion in assets.

“World events have put economic growth on a roller-coaster ride over the past three years,” the report stated. “[Allocators] will watch a number of indicators to determine when growth is back on track, but it all starts with the consumer. Consumer spending tops the list of growth indicators (and also ranks among the top five economic threats). Consumers alone can’t drive growth this time, and [investors] will also monitor business spending, employment and productivity.”

Nearly half of the participants saw stagflation as a greater risk than recession, with 56 percent expecting inflation will “remain stubbornly elevated in 2023.”

Despite the looming threats, allocators are optimistic on most asset classes in 2023. Most promising was private equity, with 63 percent of the participants having a bullish outlook as investors try to make up for lackluster equity returns.

Fifty-six percent were “bullish” about the bond market in the coming year, with expectations of higher rates after years of a low-interest rate environment. Fifty-three percent of investors saw a robust outlook for the stock market, despite the downturns of the past year.

“With so much downside having been priced in over the course of 2022, it’s likely investors are looking ahead to recovery since the bulk of the damage has already been done,” according to the report.

Real estate, on the other hand, had the highest bearish consensus. Despite its inflation-protection features, the pandemic has impacted commercial real estate as remote working models disrupt the market.

“And after witnessing a run-up on residential real estate values during the pandemic, institutional investors see rising rates and declining home prices and 74 percent are bearish,” according to the report.