Institutional investors are focused on a long-term horizon and generally do not overreact to short-term market risks, said Josh Emanuel, chief investment officer at Wilshire Associates.
However, Mr. Emanuel noted in an interview, that persistent high inflation has compelled some institutional investors to revisit their allocations to include inflation-sensitive assets, especially real assets, to further diversify their portfolios.
"Many institutional investors have been structurally underexposed to inflation-sensitive assets," he said. "Now we are seeing increased interest in these kinds of investments from our institutional clients."
Such assets, Mr. Emanuel noted, typically include commodities, real estate and infrastructure.
"The allocation to real assets among institutional investors can vary widely, depending on their investment objectives and overall risk tolerance," he said.
Within stocks, Mr. Emanuel currently favors emerging markets due to their attractive valuations and their central banks' accommodative monetary policies relative to developed markets and small-cap stocks because of their attractive valuations relative to large-cap stocks.
Within fixed income, he likes investment-grade credit over Treasuries due to their attractive spreads.
Mr. Emanuel also believes the chances of the U.S. economy entering into a recession this year has "meaningfully declined" given some strong economic data points, including the historically low jobless rate, retail sales and consumer spending, among others. "Investor sentiment has also improved," he added.
The Federal Reserve has done the right thing in boosting rates to fight inflation, Mr. Emanuel noted.
"The market is pricing in one or two more rate hikes this year," he said. "But it's important to remember that these rate hikes take time to flow through into the real economy. Thus, it may take a while to see if the Fed's policies have brought down inflation."
Moreover, while some analysts have warned that corporate earnings will be under pressure this year, Mr. Emanuel counters that earnings expectations were optimistically high at the beginning of the year and most investors already knew that. "Now these estimates have come down and the market has already priced in more moderate earnings growth," he said. "So I think most of the earnings risk is priced in."
Wilshire advises on more than $1.2 trillion in assets, including $79 billion in assets under management.