The credit crisis hangover might be over, but pension funds and other institutional investors are not about to start partying again — despite 2009's rally in stocks, credit and some alternative investments like hedge funds.
That's because for institutional investors, 2010 is going to be a year of change as central banks react to the global economic recovery and begin to withdraw the fiscal stimulus that seeded the recovery and to raise interest rates.
Nonetheless, the move into equities and credit is expected to continue even if rates of return are only mediocre, according to leading market strategists.
After hitting bear-market lows in March at the height of the credit crisis, stocks surged, with the Standard & Poor's 500 index gaining nearly 65% from early March through Dec. 31. Over the same period, the blue-chip Dow Jones industrial average rallied 59% and the Morgan Stanley Capital International Europe Australasia Far East index skyrocketed 73%.
“Although things have come a long way, those assets don't necessarily look expensive,” said Richard Lacaille, the London-based global chief investment officer at State Street Global Advisors, referring to stocks and bonds. “There's still potential in equities, potential in credit. And we're still a little bit overweight in emerging markets relative to developed markets.”
Strategists agree that what's likely to keep returns moderate at best this year is policymakers' response to a growing global economy.
“The (equity) market is waiting for a change in policy, both monetary and fiscal,” said Milton Ezrati, senior economist and market strategist at Lord, Abbett & Co. LLC, Jersey City, N.J. “If the authorities fail then the market will face a headwind.”
“The Fed has to withdraw the stimulus,” said Mr. Ezrati, who is also a partner at the $89 billion manager.
Jeff Saef, director of multistrategy investment solutions at BNYMellon Asset Management, New York, agreed that any interest rate tightening by the Federal Reserve is unlikely until the second half of the year, but only when the labor market has improved.