Institutional investors and outsourced CIOs are adopting conservative, cautious stances in portfolios for the final quarter of what has been a difficult year, partly due to fears that supportive policies may be pulled back too quickly.
Before the end of the year, investors will also have to deal with political events — the U.S. presidential election and the end of the Brexit transition period — and the potential resurgence of the coronavirus and associated lockdowns in Western economies.
These fears are leading some investors to pare back on risk assets, while others are adding protection into portfolios in order to try to eke out gains from equity exposures while also hedging downsides.
"We have adopted a conservative stance as we move into the final quarter of the year," said Mirko Cardinale, head of investment strategy and advice for USS Investment Management Ltd. in London. USS IM is the in-house manager for the Universities Superannuation Scheme, London, which had £67.6 billion ($83.8 billion) in assets as of March 31. "This is because, while the markets rebounded relatively quickly after the initial impact in March, there are many clouds on the horizon."
Sources highlighted that much of the recovery in global markets and across asset classes is thanks to unprecedented monetary and fiscal policies, with trillions of dollars pumped into developed market economies and various employment and fiscal schemes adopted by governments and central banks. The fear that this support may be withdrawn is, in some cases, leading to cautious positions.
"The U.S. and European economies have been on life support for the last few months but there is serious risk of unemployment buildup and business failures if that support is pulled back too quickly. And that is without the risks arising from the political dimension," Mr. Cardinale said, citing the U.S. election and the potential no-deal outcome for Brexit.
Global markets plummeted in March following the outbreak of the coronavirus pandemic and subsequent lockdowns in western economies. However, markets quickly recovered: the MSCI ACWI is up 4.88% for the year through Oct. 15 on a total return basis.