Investors defensive and gloomy into 2023

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Natixis sees major concerns among clients about the economy and inflation in 2023. The year starts with a defensive portfolio with many bonds, less real estate and various hedging.

  • More than 80% of institutional investors from all corners of the world except Asia expect their economies to enter a recession next year.
  • Most of them believe that inflation will remain high and that central banks cannot do much about it without fiscal support. Almost half believe that a soft landing is unrealistic.
  • Rising interest rates make bonds attractive again, but there are concerns about liquidity in the market.
  • The opinion on shares varies from institution to site. They are positive about private equity and ESG investments. A large increase in green bonds in the portfolio is expected. On the other hand, they are negative towards real estate.
  • The outlook for emerging markets is unclear, primarily due to the geopolitical tensions between the US and China. But the large fluctuations in the currency market and the lack of ESG investments are also a disadvantage.

These are some of the highlights of Natixis Investment Managers’ Outlook 2023, in which the asset manager surveyed 500 pension funds, insurance companies, family funds and other institutional investors. Together, they have more than $20 trillion in assets under management.

stagflation

The Outlook shows that, on balance, the institutions are more concerned about inflation than growth. Many of them (65%) say the risk of a recession pales in comparison to the risk of stagflation and rising unemployment.

They hope that central banks will be able to avoid a recession, but they don’t believe it. But it’s still better than letting inflation get out of control. 85% think a recession is imminent and 54% say it’s not that bad as long as inflation gets under control.

Bonds attractive

The positive thing about the rise in interest rates is that bonds are attractive again. Seven out of ten institutions expect fixed income to increase next year.

“Seven out of 10 institutions expect fixed income to increase next year”

Other major investor concerns include the Ukraine war and the power struggle between the US and China. 65% of institutions believe that the world will split into two blocs, with China and the US being the dominant factors.

Less risk

With relatively high concerns about the economy in 2023, it is logical that a small majority of institutions (53%) are actively “de-risking” their portfolio. This means, for example, more government bonds, investment grade bonds and alternative (hedging) strategies. Gold also fits in there. 76% believe gold will at least outperform crypto.

“76% believe gold will at least outperform crypto”

As mentioned, sentiment is mixed for stocks. A majority believe that the valuations are still too high. They are inconsistent with the gloomy outlook for the company’s fundamentals such as earnings, sales and cash flow.

Big caps

60% believe that large caps will outperform small caps. An outperformance is expected from the healthcare, energy and financial sectors. The institutes expect an underperformance of producers of luxury goods and real estate (47%). Interest rates and the fall in house prices (assets) are partly to blame for this.

“Stock Dividends Expected from Healthcare, Energy and Financials”

Most investors are positive about private equity (62%) and bonds (56%) and divided between shares and private debt. They are mostly negative towards commercial real estate (82%). 61% believe that a preference for working from home will continue, leading to a strong impairment.

Higher interest, less liquidity

Liquidity is becoming increasingly important due to the renewed interest in bonds and the phasing out of central bank purchase programs. The number of institutional investors citing liquidity as one of the biggest risks has almost tripled in a year, from 13% to 36%.

Active beats passive

According to Natixis, there is a clear trend from passive (index) funds back to actively managed portfolios. 60% say their active investments have outperformed the benchmark over the past 12 months, recognizing the limitations of passive investing in times of volatility. Given the outlook for 2023, 74% believe the market will favor active managers in 2023.

“There is a clear trend from passive (index) funds back to actively managed portfolios”

That Editors of IEXProfs consists of several journalists. The information in this article is not intended as professional investment advice or as a recommendation to make particular investments. It is possible that editors have positions in one or more of the listed foundations. Click here to get an overview of their investments.

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