Global fund managers expect a sharp increase in market volatility next year amid growing geopolitical uncertainty and a marked shift in fiscal policy, a survey has found.
Subscribe now for unlimited access.
$0/
(min cost $0)
or signup to continue reading
"Unprecedented economic and political forces around the world are the top concern for institutions in 2017," said John Hailer, CEO of Natixis Global Asset Management, which conducted the survey.
Geopolitical events were the top response for sources of volatility, with 65 per cent of managers citing it as a factor for the coming year.
The rise of populism as exemplified by Brexit, the election of Donald Trump in the US and Rodrigo Duterte in the Philippines, and the no vote in the Italian referendum, as well as events such as the impeachments of Brazilian President Dilma Rousseff and South Korean President Park Geun-Hye represent a new era of global uncertainty for investors.
Upcoming elections across Europe including French presidential elections in April and May as well as German and Dutch parliamentary elections are expected to continue this trend.
Meanwhile, interest rates were the third-most popular response after the US election, being cited by 37 per cent of surveyed institutions.
Investors fear US Federal Reserve chair Janet Yellen will increase interest rates if the market continues to grow, a shift from last year and the policies of her predecessors Ben Bernanke and Alan Greenspan in which interest rates were lowered during times of market stress.
These previous policies essentially amounted to a put option that shielded investors from major price drops.
"Navigating the volatility will mean resetting investment priorities and revisiting investment strategy," said the report.
This will see a move away from index-reliant passive management towards active strategies as investors hope to harness volatility in the market.
"In volatile markets, institutions are looking to active management to strengthen returns and manage risk," Mr Hailer said, noting the past seven years saw only sporadic bouts of volatility.
Active management sees fund managers attempt to beat market indices by buying and selling their portfolio's securities based on analytics, forecasts and their own judgement.
"Institutional investors will look to active management to capitalise on newly found dispersion in pursuit of returns, and turn to alternative investments to diversify portfolios and manage risk in advance of interest rate movement," the report said.
Investors will rely more on equities and alternative investments in their asset allocation plans, and less on fixed-income investments, real estate and cash.
Among equities, 39 per cent of institutional managers said emerging markets would see the biggest gains next year, while 32 per cent expect private equity to fare the best among alternatives, and 53 per cent said high-yield issues will outperform among bonds.
On the other hand, respondents said US stocks, medium and long-term government bonds and real estate could be the weakest performers in their respective categories.
The survey included 500 managers of corporate and public pension funds, foundations, endowments, insurance funds and sovereign wealth funds across Europe, Asia, the Middle East and the Americas.
