Institutional Investors Reveal Top Concerns for 2025 Markets

Optimism and Concerns in Institutional Investment for 2025

BOSTON--The end of 2024 presents a bright macroeconomic view, with decreasing inflation and interest rates offering hope to investors. However, despite this positivity, Canadian institutional investors remain worried about valuations and volatility, with a survey by Natixis Investment Managers finding that these concerns rank highest in their investment portfolios for the upcoming year.

In a comprehensive survey, Natixis IM spoke to 500 key institutional investors managing a staggering $28.3 trillion in assets globally, which notably includes $2.1 trillion from Canada. This financial pulse check reveals a complex backdrop where optimism is mixed with caution.

The Valuation Dilemma

During a two-year bull market where gains have predominantly benefitted tech stocks, Canadian institutional investors have marked valuations as their foremost risk, with 50% of survey participants agreeing on this point. The sentiment reflects skepticism about current equity valuations not aligning with underlying economic fundamentals, a notion echoed by a majority of 81% of respondents. Yet, there's a contrasting optimism, as about 72% believe 2025 could mark a turning point for more realistic valuations, despite a significant 78% citing that central bank policies will ultimately determine the sustainability of market rallies.

Fading Recession Fears

One striking change is the shift in sentiment regarding a potential recession. In this year's survey, just 44% of Canadian institutions view recession as inevitable, compared to 63% expressing similar concerns last year. Additional insights reveal that 41% do not anticipate a recession at all in 2025. Nonetheless, 22% still remain cautious, voicing concerns that a recession could derail the current market recovery.

Slightly over half of the respondents (56%) expect a 'soft landing' for the economy, while only 19% foresee a hard landing. Strikingly, just 16% predict no landing, and only 9% are worried about stagflation.

Understanding Inflation Projections

The outlook for inflation is evolving as well. A notable 41% of institutional investors foresee a decline in inflation rates, while over half (56%) believe it will stabilize at current levels throughout 2025. A strong majority, 81%, are confident that inflation will ultimately align with target levels in the near future, although 19% have lingering fears of possible inflation spikes in the coming year.

Addressing Economic Threats

Even with a more optimistic outlook, Canadian institutional investors are wary of various economic threats. The specter of ongoing geopolitical tensions looms large, especially concerning current conflict expansions (50%) and the complicated US-China relationships (44%).

Despite optimism seen in key asset classes, institutions predict heightened volatility across stocks (59%) and bonds (59%) in 2025, while 50% expect rises in unemployment rates.

Risk Management Strategies

Portfolio strategies indicate a balanced approach, with half of institutions (50%) actively working to de-risk their portfolios, maintaining the same level of caution noted from the previous year. Simultaneously, about 41% of respondents express a willingness to take on additional risks in their investment strategies for 2025.

The Shift towards Alternatives

Alternative investments are projected to play a pivotal role in institutional portfolios moving forward, with 78% of survey participants believing that a diversified portfolio comprising 60% stocks, 20% bonds, and 20% in alternatives will outperform the traditional models. There's a clear intent to include more private assets in these portfolios.

Institutional investors have shown a marked interest in private equity, with 78% expressing optimism about this sector, an increase from 75% last year. Additionally, 91% anticipate that forthcoming interest rate cuts will enhance deal flow in private markets, while 75% predict a rise in private debt issuance resulting from growing borrower demands.

Emerging Markets and Decoupling

Emerging markets face hurdles due to a faltering Chinese economy, with 84% of respondents believing that a lower growth trajectory is the new norm for China. However, 56% still see potential for these markets as conditions improve in 2025, with 75% asserting that easing monetary policies in developed nations are critical for accelerating this growth.

The Future of Active Management

Lastly, an overwhelming majority of institutional investors (72%) believe that active management will become increasingly essential in 2025, with two-thirds affirming that their actively managed portfolios surpassed benchmarks over the past year.

Given the changing landscape in interest rates and credit, the consensus is that active investing will prove beneficial for institutions. A solid 75% of respondents endorse active management as a vital component in fixed income investing strategies.

Frequently Asked Questions

What are the main concerns for institutional investors in 2025?

Institutional investors are primarily concerned about valuations, inflation risks, and geopolitical tensions.

How do Canadian institutional investors feel about a potential recession?

The number of Canadian institutions fearing a recession has significantly decreased from 63% in 2024 to 44% in 2025.

What does the survey indicate about inflation?

The survey shows that 41% of investors believe inflation will decline, with 81% confident it will eventually meet target levels.

How important are alternative investments for the future?

78% of investors believe alternative investments will outperform traditional approaches in 2025.

What is the outlook for active management in 2025?

75% of institutional investors see active management as essential, especially in fixed income investments.

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