Rising inflation is driving institutional investors away from traditional asset classes, finds research

A new survey seen by The TRADE finds that pessimism in stock markets is on the rise, with numerous asset managers reporting losses and over half fearing a prolonged recession.

High levels of global inflation and recessionary fears are forcing institutional investors to radically shift their portfolios away from equities and bonds, according to new research from Clearwater Analytics.

The study, which covered over 130 institutional investment firms representing more than $9 trillion assets under management, found that just 17% of asset managers favoured equities in the current climate, compared to 38% in a similar poll conducted six months ago.

CPI data released earlier this week showed UK inflation levels at their highest in over 40 years, hitting 10.1% in June. Numerous asset managers have reported losses in the first half, while over half of respondents to the survey noted that they were avoiding realising losses for P&L purposes, and 48% expressed concern that the UK could be heading into a prolonged recession.

Interest in floating rate securities was down from 50% to around 20%, reflecting the radical impact of inflation (currently at its highest point in over 40 years in the UK) on investment strategies, while around a third of investment firms said that their fixed income risk reduction was focused on duration.

By contrast, it looks as if money markets and real assets are proving to be more attractive in the current climate, with 38% and 30% of respondents citing them, respectively. 

The research also suggested a growing need for institutional investors to be able to easily see exposures across sectors and risk parameters amid heavy market volatility – with two thirds stressing the importance of this.

However, over a third believe that their investment technology platforms are lagging behind industry standards, highlighting the importance of technology investment as a means of competitive advantage.

“The power pincer movement of low growth and rising inflation paints the bleakest of bleak pictures. But while profits are being squeezed for investors, both in investment return and across their companies given inflation, there is still an underlying sense of optimism,” said Gayatri Raman, President of Europe and Asia at Clearwater Analytics.

“Over 40% of the firms believe that there are plenty of opportunities that have been presented by the downturn in global markets. Key to realising these opportunities is getting a more granular understanding of exactly how portfolios are being affected to help manage expectations. Being able to project cash flows and income provides perspectives that can help investors navigate through the likely recession and make better informed long-term decisions.”