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.
Natixis IM’s global survey of more than 500 investment professionals found recession was the top of people’s concerns. Although the number of selectors who think recession will be avoided has increased by 20 per cent over the past year, almost half of respondents (49 per cent) said recession was inevitable.
In total this was cited as the biggest concern – mentioned by 52 per cent of respondents, followed by the threat of war and terrorism (50 per cent) and a central bank policy error (36 per cent).
However, while most (56 per cent) 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 per cent) think valuations still don’t reflect company fundamentals, and 65 per cent expect stock market volatility to be even greater this year than last.
In total 62 per cent believe their country’s economy will experience a soft landing, more than half (60 per cent) see the greater risk coming from stagflation, with concerns running highest in Asia (79 per cent), EMEA (66 per cent) and the UK (58 per cent).
Looking at how fund selectors are reacting to this risks, most 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.
In keeping with an outlook that anticipates rate cuts, nearly two-thirds of respondents (66 per cent) are bullish on bonds this year, with the outlook most appealing to those in EMEA (70 per cent) and the UK (66 per cent).
Overall 62 per cent 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 per cent) say they have already extended duration, and those who haven’t are reportedly waiting for rates in the 5.01 per cent to 5.5 per cent range (35 per cent).
In addition to bonds, private assets continue to be the headline on allocation plans, with fund selectors bullish on both private equity (55 per cent) and private debt (57 per cent).
Of the 79 per cent who invest in private equity, 88 per cent plan to maintain (49 per cent) or add to (39 per cent) their holdings. In fact, as those responsible for evaluating investments for wealth management platforms, selectors say clients want more private assets (51 per cent), with six in 10 reporting that it’s becoming easer to meet that demand as more retail-friendly vehicles are helping them to enhance diversification.
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 per cent 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 per cent) believe AI will help them unlock opportunities that were not clearly visible before, while another 64 per cent think the technology will help them uncover hidden risks. Adoption rates are already strong among fund selectors, with more than half (51 per cent) already using AI to aid in their analysis.
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 per cent of assets to active investments and 36 per cent to passive.
However 50 per cent of selectors surveyed by Natixis IM attribute the recent outperformance of passive investments to central bank policy, 10 years of artificially low interest rates and relatively no inflation.
With the landscape now shifting, nearly six in 10 (58 per cent) report that active investments on their platforms outperformed passive in 2023. With rates looking to remain higher for longer, 68 per cent of fund selectors now say markets favour active managers, and given an uncertain outlook, 75 per cent believe active investments will be essential to finding alpha in 2024.
Natixis head of UK sales Darren Pilbeam says: “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 emerging market bounce-back.
“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.”
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