Public pension funds, insurers, sovereign wealth funds, foundations, and endowments around the world are facing 2022 with confidence despite the travails of the pandemic, a Natixis IM survey of 500 institutional investors has found.

“What strikes me is the optimism, if you read between the lines, there is no fear actually, people are expecting a lot from the market,” Natixis’ head of Asia Pacific, Fabrice Chemouny told AsianInvestor.

The survey, released Thursday (December 9), found that institutional investors plan to make few broad changes in their overall allocation to stocks (39%), bonds (37%), cash (5%) and alternatives or other (19%) in the year ahead. Instead, they are positioning themselves to make tactical moves.

The optimism comes despite the threat of rising inflation — which 69% of respondents cited as a top portfolio risk — and extremely volatile markets causing a loss of confidence in stock valuations.

An overarching theme among investors is that navigating 2022 will require an active strategy. Almost 75% of those surveyed said their active investments outperformed the benchmarks over the past 12 months.

“You need to be selective. Not everything will be going up. Not all the sectors. And I think investors should have active managers - ones with strong reasons and search capabilities - who are able to detect what could be the strongest sectors versus the ones losing ground,” said Chemouny.

REVENGE SPENDING

The pandemic is no longer being viewed as the biggest threat to growth, with 45% of the investors expecting the economy to fully recover from Covid in 2022.

Fabrice Chemouny,
Natixis IM

In fact, 62% of the investors expect a significant driver of economic growth next year will be pent-up demand for big-ticket items from consumers who have endured lockdowns across the world.

Many of these consumers continued to earn while in lockdown but had few opportunities to spend. As Covid restrictions scale back, the investors surveyed expect these consumers to engage in what has been dubbed "revenge spending".

 

“From observations in the survey, clearly these confinements generated some frustrations, and people now want to consume, and spend money, they are frustrated and they want to buy,” said Chemouny.

“Earlier this year, we have already seen some of this in China — all the luxury brands, recorded triple digit numbers in terms of growth which could be seen in the stock valuation from these brands,” he added.

Even if they are optimistic, few investors think the return to pre-Covid GDP levels will happen overnight, as only 17% think they’ll see it in the first half of the new year. Most see a return to normal levels either in the second half of 2022 (31%) or sometime in 2023 (37%).

Most investors believe that policy makers ultimately hold the keys to economic recovery and that those policies are behind the current imbalance in supply and demand, inflation, and distorted stock valuations.

HUNTING FOR YIELD

The survey found that institutions are on the hunt for yield, following a decade of low rates, and some even sinking into negative territory during the pandemic.

Private assets and alternatives were on the bucket list in 2021 with 84% of institutional investors now investing in private equity, 81% private debt and 81% in infrastructure.

By region, the UK had the highest usage of private equity among institutional investors at 96%. This was followed by EMEA (86%), North America (81%), Latin America (79%) and Asia (76%).

Investment in these asset classes is more than a trend, according to Chemouny, as asset owners must continue to generate yields but are limited in how much they can allocate to equities.

“We have seen a spike in private credit and private debt, and while there are some differences between the Asian countries, the market is there,” he said.

For 2022, investors have pointed to information technology (45%), healthcare (41%) and infrastructure (40%), followed by energy (34%) as the most attractive sectors.

“Infrastructure has been one of the most surprising findings from the survey. There is clearly high demand from asset owners, they are looking for quality projects with good managers who have a strong track record and solid experience and then be ready to win,” said Chemouny.

However, less than half of respondents (45%) think private assets will offer a safe haven in the event of a market correction, as private markets continue to rise into record territory. 69% of those surveyed are concerned that institutions have taken on too much risk in their pursuit for yield.

The survey also found that institutional investors are growing more accepting of digital assets — with 40% calling them a legitimate investment opportunity, and 28% already investing in cryptocurrencies.

By region, investors in Latin America (50%) and the UK (48%) were the most likely to see crypto as a legitimate investment opportunity, while investors in Asia were the least likely at 31%.