Institutional investors expect favorable market conditions in 2024 will continue into the new year, but they are cognizant of lurking macroeconomic threats, according to a survey by Natixis Investment Managers released on Dec. 4.
Among the top threats cited by survey respondents are the ongoing geopolitical tensions between China and the U.S., selected by 34% as their top concern on the near-term horizon. That worry was followed by the continuing wars in Ukraine and Gaza (32%), the chances of a global recession (29%) and the health of China’s economy (23%).
Within specific countries, institutional investors in Germany (53%), the U.K. (42%) and France (38%) pointed to U.S.-China relations as their top macroeconomic threat for the new year. Among institutional investors in the U.S., they were most concerned about current regional wars (33%), persistently high inflation (30%), and rich equity valuations; followed by tense U.S.-China relations (26%).
Regarding the war in Ukraine, 78% of U.S. institutional investors think the conflict will grind on through 2025, while only 22% think the war will end. Regarding the war in Gaza war, 60% of U.S. institutional investors believe it will spread across the Middle East region, while 40% believe a settlement will be reached.
However, both U.S. institutional investors (74%) and institutional investors across the globe (66%) worry that the growing alliance between Russia, North Korea and Iran will lead to greater economic instability.
China, rate cuts
U.S. institutional investors are also concerned about China’s economic and regulatory environment. An overwhelming 91% said that regulatory uncertainties in China make the country a less attractive investment opportunity; 87% said a “conscious decoupling” from China presents an opportunity for new emerging markets to climb the global ladder; 79% said China’s geopolitical ambitions diminish its investing appeal; and 65% said tensions in the South China Sea will become a more immediate threat to markets.
Despite these ongoing worries, the survey revealed that U.S. institutional investors hold an optimistic economic outlook. For example, almost three-fourths (73%) of U.S. institutional investors believe a recession is unlikely in 2025. (Last year, 62% of U.S. institutional investors believed a recession was inevitable in 2024).
The significant shift in recession beliefs, Natixis said, is due mainly to the Federal Reserve’s progress in navigating a soft landing. Some 71% of U.S. institutional investors think the U.S. economy will reach a soft landing in 2025.
Most U.S. institutional investors (73%) expect between one and three rate cuts in 2025, with 55% saying inflation targets will be achieved in 2025.
“Subsiding recession fears in 2024 have given way to enthusiasm for strong returns on the horizon, but investors are still looking over their shoulder at the geopolitical and economic risks,” said Dave Goodsell, executive director of the research firm Natixis Center for Investor Insight, in a release issued along with the survey. “While the U.S. election gives some clarity to institutional investors of the direction that economic and foreign policy could go, there is still a lot of ‘wait-and-see’ as investors calibrate their portfolios to account for the opportunities the market has to offer versus the risks it could see in 2025.”
In addition, U.S. investors remain optimistic about global equity and bond markets. Going into 2025, 59% of those surveyed are bullish on stocks; and 40% think impending rate cuts will accelerate equity gains. Almost one-half (47%) believe outperformance will be less concentrated and in multiple sectors, including financials (48%) and energy (48%) healthcare (44%) and information technology (42%).
Bond markets
Regarding bond markets, 59% of U.S. respondents had a positive outlook compared to 62% of global institutional investors. While global investors expressed concerns about defaults, 73% of U.S. respondents believe that corporate defaults will remain low in 2025. Moreover, 60% of U.S. institutional investors believe that active investing will again outperform passive investing in 2025.
With respect to alternative assets, 60% of U.S. institutional investors are bullish on private equity and 59% on private debt. Indeed, some 65% believe that a portfolio with 60% stocks, 20% bonds and 20% alternatives will outperform the traditional 60%-40% stock-bond portfolio.
With rate cuts expected, 80% of U.S. institutional investors anticipate deal flow in private markets will improve, with 74% believing that more private debt will be issued in 2025 to meet demand.
In October, Natixis IM surveyed 500 institutional investors across the globe who collectively manage $28.3 trillion in assets for public and private pensions, insurers, foundations, endowments, and sovereign wealth fund. Natixis IM has more than $1.4 trillion assets under management.
