Institutional Outlook: Forecasting Dynamic Changes

Institutional investors anticipate a year of dramatic change in 2017. A global wave of populism is upending conventional thinking about politics and economics. Central bank policies, which have driven investment performance for nearly a decade, are beginning to diverge. The U.S. Federal Reserve is likely to raise rates, while other central banks are challenged to scale their asset purchase programs. The upshots are concerns among institutional investors about volatility, geopolitical risk, and monetary policy, which we see them addressing using a three-part approach:

  • Active management: Almost three-quarters also say current market conditions are more favorable to active management. Higher volatility is likely to lead to greater dispersion1 within equity markets, and institutions believe the tide is turning in favor of active management. Institutions anticipate adding considerably less to current passive allocations over the next three years than in previous estimates.
  • Alternatives for diversification: Looking at a market that could be marked with a double-hit of increased volatility and rising interest rates (at least in the U.S.), institutions say they will dial back on fixed-income allocations, and two-thirds of institutional investors globally say it is essential to invest in alternatives in order to diversify portfolio risk.2
  • Sector calls: In looking at sector performance, institutional investors are split on just what will result in a big gain or a big loss in 2017. Financials sit atop the projections for the biggest gainers but also rank second, behind utilities, as the biggest disappointment in the year ahead. The divergence of opinion indicates a clear philosophical split.
On the heels of a tumultuous political year, institutional investors believe that geopolitical volatility will translate into market volatility for investors in 2017. Navigating the volatility will mean resetting investment priorities and revisiting investment strategy.

 

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2016 Global Institutional Investor Survey

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