More than three-quarters of institutional investors are concerned that the prolonged period of low interest rates has led to bubbles in one or more asset classes.
This is according to a Natixis Investment Managers survey of 500 global investors managing more than $19 trillion of assets combined, including managers of pension funds, endowments, foundations, insurance funds, and sovereign wealth funds.
Just under a third of survey respondents said they believed there was a bubble in the stock market, while 42 percent believed the bond market was at risk. Nearly two-thirds said Bitcoin was in a bubble — and this was a month before the cryptocurrency surged above $10,000 last week.
Overall, investors predicted both stock and bond markets would experience greater volatility next year, with 72 percent expressing surprise that the current low-volatility environment has lasted as long as it has. Of those surveyed, 59 percent agreed that flows into passive strategies had artificially suppressed volatility during the past year.
“Investors are facing unprecedented challenges as central banks unwind the easy money policies that have dominated the markets since the financial crisis and prepare for the first challenging bond market in more than a generation,” said David Giunta, chief executive for the U.S. and Canada at Natixis Investment Managers, in a statement.
In addition to interest rate increases and asset bubbles, surveyed investors cited possible geopolitical events like unfavorable Brexit negotiations and nuclear war with North Korea as threats to their investment performance next year.
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More than three-quarters said they think the 2018 market environment will be better suited to active management, highlighting advantages including better access to emerging market opportunities, exposure to non-correlated asset classes, and downside protection, as well as the ability to take advantage of short-term market movements and generate higher risk-adjusted returns.
Planned allocation changes included increased exposure to alternatives, with 39 percent aiming to up their private equity commitments and 36 percent intending to put more money in private debt. In public equities, 36 percent said they would decrease their exposure to U.S. stocks, while 33 percent planned to increase investments in European equities. Twenty-seven percent said they would up their allocations to emerging market stocks.
Robert Hussey, executive vice president of Natixis Investment Managers’ institutional services group, said institutional investors are exploiting their scale and long-term horizon to overcome market challenges.
“By embracing alternative strategies such as infrastructure and the private markets, institutions are still confident they can weather the obstacles that lie ahead and fulfill their mandates,” he said.