Institutional investors are preparing their portfolios for stagflation, with differing approaches.
In a CoreData Research survey of 202 global institutional investors, 51 percent of respondents said the surge in energy prices coupled with the Russia-Ukraine war will send the global economy into stagflation — a period characterized by high inflation, slowing economic growth, and high unemployment. In response to these fears, 43 percent of respondents said they plan to raise allocations to assets positively correlated to inflation, including commodities and real estate.
The survey, which was conducted in April 2022, included respondents from corporate and public pension plans, insurance companies, endowments, foundations, and other “official” institutions.
According to additional data provided to Institutional Investor, the response to stagflation fears varied regionally. In North America, just 31 percent of respondents said they planned to raise allocations to assets linked to inflation, compared to 43 percent of global respondents. Meanwhile, CoreData said 49 percent of European respondents intended to seek out inflation-sensitive assets, the highest across all regions.
Twenty percent of respondents globally said they believed private assets are the best hedge against the inflation caused by the conflict, with 17 percent saying they would increase allocations to private assets as a result of the macroeconomic uncertainty.
A smaller proportion of respondents said the Russia-Ukraine conflict would bode well for cryptocurrencies. For example, 9 percent of global respondents said the crisis would help establish crypto as a safe haven asset for investors during periods of inflation and market volatility. Among respondents from the Asia-Pacific region, 15 percent believed this to be true.
Institutional investor respondents also indicated that the war would shape their approaches to environmental, social, and governance issues. In fact, 50 percent of respondents said they are set to change their ESG strategy to exclude Russian investments.
They expect asset managers to follow suit, with 49 percent of respondents saying that managers who invest in Russian assets “cannot claim to be ESG compliant.”
The Russia-Ukraine war may also prompt a shift in investor attitudes toward investments they previously considered unethical. According to the survey, 17 percent of respondents said they plan to change their ESG strategy to allow investments in defense-related companies as a result of the war. Fifty percent of respondents said they are undecided on the issue.
These views also varied regionally. For example, in the Asia-Pacific region, 60 percent of respondents said they are set to exclude Russian investments.
In addition, 35 percent of APAC respondents said they will allow investments in defense-related stocks in response to the invasion. In North America, however, only 11 percent of respondents said they will permit investments in defense-related companies.