2021 offered investors a robust recovery from the early economic turmoil of the COVID-19 pandemic. But will it hold in 2022? A survey of 500 institutional investors from around the world by Natixis Investment Managers identified the sectors and asset classes where the biggest gains are expected next year, as well as the biggest risks. Let’s take a look at where these investors will invest and what has them worried.
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Institutional investors who responded to the Natixis Investment Managers survey said they are mostly bullish on emerging markets, small-cap stocks and active management strategies in 2022, but inflation and rising interest rates remain key portfolio risks.
The Global Survey of Institutional Investors, which was conducted in October and November by CoreData, polled institutional investors in 29 countries throughout North America, Latin America, the United Kingdom, continental Europe, Asia and the Middle East. The respondents represent corporate, public and government pension plans, endowments and foundations, insurance companies, sovereign wealth funds and central banks.
How Institutions Will Invest in 2022
The Natixis survey shows that institutional investors believe value stocks will outperform their growth counterparts, while 70% say markets will favor active investment management over passive strategies.
“In the end, they believe it won’t be overall allocation strategy that determines success. Instead, their ability to deliver results will rely on tactical decisions that help them navigate an unlikely market environment and factors unique to the post-pandemic world,” wrote Dave Goodsell, executive director of the Natixis Center for Investor Insight.
But when it comes to asset allocation, institutional investors have their eyes on particular areas. Among equities, institutional investors are most bullish on stocks in emerging markets, as 41% said they would increase their allocation in 2022. Meanwhile, only a quarter said they would bulk up on U.S. equities, with 36% saying they plan to lessen their commitment to U.S. stocks in 2022.
Energy and healthcare are the two sectors that appear poised for the most success in 2022, according to the survey. Among the institutional investors who were polled, 59% said energy would outperform the market as a whole and another 20% said the sector would produce the market average. Twenty-one percent said energy would lag behind the broader market. Meanwhile, 49% said healthcare would outperform the market and another 37% said its performance would be in line with the market average. Only 14% of institutional investors believe the healthcare sector will underperform against the broader market.
What’s the sector that institutional investors are most bearish on? Real estate. Only 18% said the real estate sector would outperform the market as a whole, while 35% believe it will underperform compared to the market average. Then again, 47% said real estate returns would produce returns similar to the market average.
What Has Institutional Investors Worried?
It’s no surprise that institutional investors believe inflation and rising interest rates pose the largest risks to portfolios in the coming year. In the U.S., inflation has reached levels not seen in decades. The Consumer Price Index, the primary tool for measuring the cost of goods and services, was 6.2% higher in October than it was a year earlier.
Sixty-nine percent of institutional investors surveyed listed inflation among the top portfolio risks for 2022, although six out of 10 believe it to be transitory or temporary. However, it’s worth noting the Natixis survey was completed before Federal Reserve Chair Jerome Powell reversed course on inflation being transitory, telling Congress on Nov. 28 that it was “probably a good time to retire that word.”
Meanwhile, 68% of institutions predict the bull market will end when central banks stop printing money and 64% said interest rates also pose a risk to portfolios in 2022. A vast majority of these investors additionally said the lower rates that have come define the pandemic economy have inflated company valuations.
“The effects of low rates – along with high levels of liquidity – are felt well beyond the bond market,” Goodsell wrote. “In fact, eight out of ten institutions say low rates have distorted valuations. Another seven in ten (71%) say current valuations do not reflect the fundamentals, and the same number believe the current pace of growth is unsustainable.”
Bottom Line
Since stock prices crashed in the early days of the pandemic in 2020, investors have rode a recovery wave to new highs in the stock market. The S&P 500 is up nearly 25% in 2021, signaling a strong recovery from last year’s crash. But institutional investors believe inflation and interest rates may pose significant challenges in 2022, according to a recent Natixis Investment Managers survey. Institutional investors view small cap, emerging markets and value stocks favorably in 2022, and believe active management will outperform passive management. However, institutional investors also appear most bearish on U.S. stocks in the coming year, as 36% said they would decrease their asset allocations in 2022.
Tips for Beating Inflation
- Investors looking to protect their assets from inflation may consider a mix of short-term fixed-income investments and holdings related to commodities and real estate. SmartAsset’s Inflation Calculator can help you assess how the purchasing power of your securities may change over time.
- A financial advisor can help you gird your portfolio against inflation by investing in different assets classes. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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