Consultant Mercer has highlighted four key themes for institutional investors to overcome in 2017, if they want to be successful.
The trends include fragmentation, or a move away from globalisation, which means that investors should stress-test their portfolios against adverse market movements. Trade and currency wars could create volatility and illiquidity for investors, but could also create opportunities for active managers.
Another trend is a shift from monetary to fiscal stimulus, which could lead to a rise in inflation. In this case, investors with inflation-linked liabilities should consider inflation hedges or real assets, such as real estate and infrastructure. Uncertainty over monetary policy, if inflation starts to rise, could lead to bond market volatility and opportunities for global macro, absolute return bond and unconstrained fixed income strategies. And aggressive tightening of monetary policy may cause some companies to struggle to refinance their debt. This could create opportunities for strategies that are positioned to allocate capital to distressed assets.
Two other trends cited by Mercer are capital abundance and structural changes. Under the former, finding real returns of 3% to 4% could be difficult in the next three to four years, following a long period of central bank monetary stimulation. As a result, investors may need to consider less familiar and more flexible strategies and assets, including private markets, credit market, hedge funds and multi-strategy investing. On structural changes, Mercer highlighted the impact of climate change, saying investors should review their exposure to carbon-intensive assets. Also, global demographics, with an increase in the aging population, will affect some countries more than others and will also have an impact on bond yields.
Mercer global head of investment research, Deb Clarke, commented: “The global economy is starting to reflate with stronger growth and higher inflation expected in 2017. This coincides with a period in which monetary policy is likely to become less supportive, creating the potential for increased volatility in financial markets. Our four themes reflect some of the key issues facing the global pensions and investment community, organisations will respond in different ways, reflecting their specific beliefs, objectives, governance arrangements and constraints.”