Institutional investors optimistic about equity performance despite challenges
A recent survey of over 300 global Chief Investment Officers (CIOs), portfolio managers, and investment decision-makers suggests that institutional investors hold a broadly optimistic outlook for equity performance over the next 18 months, despite ongoing geopolitical tensions, recession fears, and the aftermath of the pandemic.
A recent survey of over 300 global Chief Investment Officers (CIOs), portfolio managers, and investment decision-makers suggests that institutional investors hold a broadly optimistic outlook for equity performance over the next 18 months, despite ongoing geopolitical tensions, recession fears, and the aftermath of the pandemic.
Conducted by Institutional Investor’s Custom Research Lab and equities-based financing firm EquitiesFirst, the survey sheds light on the perspectives and strategies of these investors in the face of economic and geopolitical challenges.
Positive Outlook for Equity Returns
Contrary to expectations, the survey reveals that most institutional investors anticipate a healthy recovery from the double-digit losses experienced in 2022. Collectively managing an estimated $8.5 trillion in assets, respondents foresee mean equity returns of 5.9% in developed markets of North America, Europe, and Asia-Pacific for 2023. Moreover, the survey indicates even greater potential in emerging markets, with expectations of average stock returns of 6.7% in European emerging markets and 6.0% in Asia-Pacific emerging markets.
Preferred Sectors and Industries
The survey highlights a strong preference for the information technology (IT) and healthcare sectors among institutional investors. Over two-thirds of respondents cite these sectors as offering the most promising returns over the next three years. However, regional differences are evident, with investors in global equities and European emerging markets displaying lower enthusiasm for IT compared to their peers. Additionally, investors in developed and emerging markets in Asia-Pacific show a keen interest in energy stocks, alongside their support for IT and healthcare sectors.
Key Concerns: Climate, War, and Cyber-Attacks
While institutional investors maintain optimism, they remain cautious of global risks that could impact equity performance. Climate change, war in Ukraine, and cyber-attacks are identified as the top concerns by a majority of investors. Macro-economic factors such as inflation, interest rates, and trade relations are also seen as potential influencers of stock market performance.
Strategies: Smart-Beta, Active Management, and Growth Focus
Regarding investment strategies, the survey reveals a preference for smart-beta strategies among institutional investors, particularly in developed markets. Tilted passive approaches provide low-cost exposure to efficient markets with significant trading volume. However, in emerging markets, active strategies are favored for capitalizing on mispriced assets and volatility-driven opportunities. Notably, investors display a strong preference for growth strategies, suggesting confidence in sustained economic growth and the emergence of high-growth companies.
Embracing Disruption and Opportunities
Institutional investors acknowledge that the same factors posing risks to their stock holdings can also create opportunities for savvy companies. Climate change, for example, may lead to the emergence of environmentally conscious companies with first-mover advantages in serving a growing market. Investors emphasize that the reaction to the climate crisis will be based on individual company performance rather than generalized sentiments.
Preparing for Volatility
Despite expectations of increased volatility, institutional investors are not resigned to endure harsher economic conditions. Instead, they aim to achieve historically attractive stock returns, particularly in the IT and healthcare sectors. To achieve this, they plan to employ a combination of strategies, including tilted passive approaches, active management, and a focus on growth investing. Furthermore, institutional investors are considering alternative financing options, such as equities-based financing, to enhance portfolio stability, diversification, and returns.
