Uncertainty remains the dominant theme for professional fund selectors in 2024, with escalating global tensions, low expectations for economic growth and a higher interest rate environment weighing on sentiment. Survey findings published today by Natixis IM show the highly complex market environment selectors are grappling with in 2024, causing those surveyed to drop long-term return assumptions by almost 28% compared to last year (6.3% vs. 8.8%).
Natixis IM surveyed 500 investment professionals in 26 countries managing a total of $34.8 trillion for public and private pensions, insurers, foundations, endowments and sovereign wealth funds.
Findings reveal that the spectre of slower growth puts recession at the top of their list of concerns (52%), followed by the threat of war and terrorism (50%), and a central bank policy error (36%). However, while most (56%) remain optimistic about this year’s market performance, their outlook is muted by a high degree of uncertainty and unpredictable risk.
Most fund selectors (69%) think valuations still don’t reflect company fundamentals, and 65% expect stock market volatility to be even greater this year than last. However, while 62% believe their country’s economy will experience a soft landing, more than half (60%) see the greater risk coming from stagflation, with concerns running highest in Asia (79%), EMEA (66%) and the UK (58%).
To shore up portfolios, selectors are not making wholesale changes to investment strategy. Instead, they’re making tactical tilts within asset classes to better prepare clients for a new environment.
Opportunity remains in emerging markets despite a slowing China
With concerns over global growth running high, recession fears are also weighing on emerging markets sentiment. After investors witnessed the positive impact China had on EMs and the global economy over the past decade With concerns over global growth running high, recession fears are also weighing on emerging markets sentiment. After investors witnessed the positive impact China had on EMs and the global economy over the past decade, sentiment has shifted with 64% of selectors believing China’s economic malaise will continue in 2024.
However, investment opportunity remains, with some looking at emerging markets as a value play. 35% think cheaper asset valuations are a key consideration for emerging market investing and eight in ten still plan to add to (35%) or maintain (46%) their EM equities allocations.
In terms of where they see the best opportunities, 48% rank Asia ex-China as their top prospect. Outside of Asia, selectors say Eastern Europe and Latin America (36% each) will present the best opportunities in 2024. China (15%) comes in at the bottom of their list of favourites for the year ahead.
Private Assets and Bonds top the allocation agenda
In keeping with an outlook that anticipates rate cuts, nearly two-thirds (66%) are bullish on bonds this year, with the outlook most appealing to those in EMEA (70%) and the UK (66%).
62% globally predict long duration bond portfolios will outperform short duration in 2024, but knowing when to lengthen duration is an unfamiliar decision for fund selectors. Almost one-quarter (24%) say they have already extended duration, and those who haven’t are reportedly waiting for rates in the 5.01% to 5.5% range (35%).
In addition to bonds, private assets continue to be the headline on allocation plans, with fund selectors bullish on both private equity (55%) and private debt (57%).
Of the 79% who invest in private equity, 88% plan to maintain (49%) or add to (39%) their holdings. In fact, as those responsible for evaluating investments for wealth management platforms, selectors say clients want more private assets (51%), with six in ten reporting that it’s becoming easer to meet that demand as more retail-friendly vehicles are helping them to enhance diversification.
The advantages of AI
Even as uncertainty prevails in their macro and market outlook, fund selectors are feeling more confident about the tech sector, having been a top driver of market returns throughout the pandemic and subsequent recovery. However, it’s AI that is driving the 2024 outlook, with 47% of fund selectors believing that it is a bigger opportunity than the internet.
Beyond simply investing in companies with AI exposure, fund selectors see direct advantages to applying the technology within their own process. Almost three-quarters (73%) believe AI will help them unlock opportunities that were not clearly visible before, while another 64% think the technology will help them uncover hidden risks.
Adoption rates are already strong among fund selectors, with more than half (51%) already using AI to aid in their analysis.
Active management
Wealth managers have been working hard to get the right balance between active and passive investments over the past decade, with fund selectors reportedly allocating 64% of assets to active investments and 36% to passive.
However 50% of selectors surveyed by Natixis IM attribute the recent outperformance of passive investments to central bank policy, ten years of artificially low interest rates and relatively no inflation.
With the landscape now shifting, nearly six in ten (58%) report that active investments on their platforms outperformed passive in 2023. With rates looking to remain higher for longer, 68% of fund selectors now say markets favour active managers, and given an uncertain outlook, 75% believe active investments will be essential to finding alpha in 2024.
Darren Pilbeam, Head of UK Sales, said: “It is clear that fund selectors expect the 2024 investment landscape to be anything but normal. Despite the shifting environment, the challenges ahead are a result of continued macro-economic and market trends – such as prevailing higher rates, the rapid impact of AI, and the possibility of an EM bounce-back – that are being forecast and planned for accordingly. Against this backdrop, selectors are preparing product and investment strategies that don’t just fit immediate client needs, but also help support them through a year that could be just as volatile as 2023. In equities, selectors are counting on large caps to carry them through what could be a turbulent year, and are lengthening duration on bonds to capitalise on the rate environment. Private assets and active management are also increasingly coming to the fore for selectors, as they seek to protect portfolios in a challenging year.”
