Institutional investors ready to move on from Covid as inflation tops portfolio risks

Supply-chain disruptions and central bank policy errors outrank Covid as next year’s top economic risks, according to a Natixis Investment Managers survey.

A majority of institutional investors said they believe life will return to pre-Covid normal next year, according to the study released Wednesday. Natixis surveyed 500 institutional investors from 128 countries who manage US$13.2 trillion in assets. Almost 150 of the responses were from North American managers.

Covid variants ranked third among economic threats for the year ahead, behind supply-chain disruptions and less supportive central bank policy.

When it came to portfolio risks, investors ranked inflation at the top, even though six in 10 respondents said they believe inflation is transitory.

Interest rates and stock valuations were the other top portfolio risks. Eight out of 10 respondents said low rates have distorted valuations, and 68% predicted the bull market would end when central banks stop printing money.

Most investors said they expect higher volatility in stocks (75%), bonds (63%) and currencies (56%), and more than seven in 10 said the stock market’s current rate of growth is unsustainable. Almost half said the volatility would create opportunities for active managers to outperform benchmarks.

Investors were optimistic about the reopening trade, with travel companies, restaurants and offices set to outperform the streaming, online shopping and work-from-home names that benefited from lockdowns.

Investors said they prefer small over large caps and value over growth. Almost one-third said they plan to decrease their exposure to U.S. equities and allocate more to emerging market, European and Asia-Pacific stocks.

Institutional investors also expressed concerns about retail investors, most notably when it came to cryptocurrencies and so-called “meme” stocks.

Cryptocurrencies are the top contender for a major correction, investors said, and almost three-quarters said cryptocurrencies aren’t a suitable investment for most retail investors. However, more than one in four said they’re increasing their exposure to crypto next year and 41% recognized cryptocurrencies as a legitimate investment option.

More than six in 10 predicted the meme stock phenomenon will continue to create risky financial bubbles, and 64% said easier access to trading was a threat to retail investors’ financial security.

Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.