Ten market trends institutional investors are watching in 2020

We know the investment trends in 2020, Natixis Investment Managers study included 500 institutional investors in 29 countries.

Despite big gains for stocks and bonds during 2019, institutional investors are worried that stalled trade talks, slow global growth, and low yields could hurt portfolio performance in 2020. But even as they see a wide range of risks for 2020, portfolio projections show institutional investors aren’t willing to make big bets or changes. Instead their strategy appears to be “Let’s wait and see.”

1. Market volatility becomes a portfolio reality

Institutions see volatility as a predictable outcome for markets in 2020 and rank it as their top portfolio concern for 2020. Three-quarters of institutional investors believe stocks will be more volatile. US politics have a big influence on views about equity volatility –many believe impeachment proceedings and the looming presidential race could both present shocks to the system.

2. Uncertain markets call for active management

With volatility rising, about half of institutions (46%) believe dispersion will be up, too. The resulting increased spread between security prices may be one reason why three-quarters of institutional investors say today’s markets favor active management. 71% find it harder to generate alpha as markets become more efficient. Institutions have been increasing allocations to active over the past three years.

3. Asset allocations remain in a holding pattern

Even though they see challenges on the horizon, institutions aren’t planning significant allocation shifts. In fact, current allocations are within one or two percentage points of what institutions projected for 2019.

4. Sector preferences reveal limited hope for growth

Sector calls reflect the same muted performance outlook –institutions express no distinct sector preferences for 2020. Institutional investors expect market performance from most sectors with split projections for outperformance and underperformance. Machine learning and quantum computing present long-term growth trends in sectors where institutions do see potential for outperformance:

5. Markets are due for a correction, but which markets…and when?

2019 was a stand-out year for stocks, especially the S&P 500 and the EuroStoxx which both reached the rarified air of 24% returns as of November 15. Almost half (48%) of institutions believe that equities are due for a correction in 2020.

6. Politics are the elephant in the room

Politics are the elephant in the room, from impeachment in the US, to Brexit in the UK, instability in Bolivia, and a rising tide of populism globally. Institutions are actively preparing portfolios for political risk.

7. Central banks, interest rates and the viability of negative yields

Even after a decade of ultra-low rates, institutions are constantly challenged in their search for yield. The pressure to deliver is so great that three-quarters of those surveyed worry that institutional investors have taken on too much risk in pursuit of yield. More than half of institutions (56%) expect an increase in the volume of negative yielding bonds in 2020.

8. Going private to get better results

Challenged to get what they need from traditional assets, institutional investors have turned to private markets. Institutions believe private assets are better suited than traditional assets for two critical portfolio functions: delivering diversification (62%) and generating more attractive returns (61%).

9. ESG (Environmental, Social & Governance) gains greater adoption as motivations gain clarity

Environmental, Social and Governance investing is being more widely adopted as 64% of institutions report they implement some form of ESG in their portfolios. Even though institutions have generally been on the leading edge of the practice, this represents a 10% increase over 2017 when 40% did not implement ESG. 57% of institutions say they do ESG to align their assets to organizational values.

10. Institutions worry about how individual investors will react

Institutions see risk on the horizon for 2020. They plan for it by managing expectations, shifting assets, and relying on a long-term plan. Those responding to our survey worry that individual investors are not prepared to weather the same risks. Three-quarters of institutions believe recession worries could drive individuals to liquidate assets prematurely.