Valuations & Interest Rates: the primary risks for portfolios in 2025
10 DEC, 2024
The latest edition of the Natixis IM Institutional Investor Survey shows that fears of an economic recession are fading, however, institutional investors still see valuations and interest rates as the main risks for 2025. Despite this, the survey reveals that institutional investors expect the anticipated interest rate cuts to improve deal flow in Private Markets. In addition, institutional investors are focusing their attention on Asia ex-China when investing in Emerging Markets in 2025.
The macroeconomic outlook at the end of 2024 appears positive, with inflation declining and interest rates falling. Nevertheless, valuations (47% globally) and interest rates (43% globally) remain the top concerns for institutional investors' portfolios in 2025, according to a new survey published by Natixis Investment Managers (Natixis IM).
Natixis IM surveyed 500 institutional investors managing a combined $28.3 trillion in assets from public and private pensions, insurers, foundations, endowments, and sovereign funds worldwide.
Following a two-year bull market where much of the gains have been concentrated in tech stocks, institutional investors highlight valuations as their main market risk. Two-thirds (67% globally) believe that current equity valuations do not reflect corporate fundamentals. However, respondents are optimistic, with three-quarters (75% globally) believing 2025 will be the year markets realise the importance of valuations. Still, 72% globally acknowledge that the sustainability of the current market rally will depend on central bank policy.
Recession fears subside
Sentiment has drastically improved this year, with only 30% of institutions considering a recession inevitable. Thus, 57% of institutional investors do not anticipate a recession in 2025. Perhaps most telling in sentiment is that less than one in five (18%) think recession will kill the current rally.
While overall sentiment is positive, regional snapshots show significant differences. Respondents in Europe (32%) and the UK (33%) were more likely to see recession as inevitable. This in Latin America (23%) were less likely. Breaking it down to country level reveals a greater divide as 73% in the US are confident there won’t be a recession, while 50% of those in beleaguered Germany say they are already in a recession. Canda (44%) and France (42%) have the largest number who believe recession is still inevitable.
If recession does arrive, most think it will be painful (66%) or very painful (12%). However, one in five (22%) think it will be hardly noticeable.
When it comes down to it, 64% are calling for a soft landing in their home region. Only 20% are worried about no landing/reflation. Fewer still project a hard landing (10%), or worry about stagflation (6%). GDP growth will be the key indicator of a soft landing for 49% of those surveyed, while 22% will look at unemployment figures. Fewer will look at more granular measures, such as CPI (19%) and PCE (9%).
A similarly positive view is reflected regarding inflation, as more than three-quarters of global respondents expect inflation to decrease or remain at current levels in 2025. Globally, two-thirds (68%) are confident inflation will meet targets next year, while less than a third (32%) remain concerned about potential inflation spikes.
Economic threats
Despite the optimism, institutional investors still see a wide range of economic threats for the coming year, with their greatest concerns being the escalation of current wars (32% globally) and US-China relations (34% globally).
While their market outlook may be optimistic, institutional investors remain realistic. Despite the relatively calm performance of major asset classes in 2024, many global respondents expect increased volatility in equities (62%), bonds (42%), and currencies (49%) in 2025.
Moreover, while confidence in cryptocurrencies has more than doubled (38% vs 17% in 2024), the speculative nature and accompanying volatility mean that 72% believe cryptocurrencies are unsuitable for most investors, and 65% do not consider them a legitimate option for institutions.
Portfolio plans reflect cautiousness, with 48% of respondents actively de-risking their portfolios. Furthermore, four in ten institutional investors say they are actively taking on more risk in 2025.
Private markets boom?
Institutions plan to continue increasing investments in alternative assets in 2025, as 61% of institutional investors surveyed predict a diversified 60:20:20 portfolio with alternative investments will outperform the traditional 60:40 equity-bond mix.
Nearly three-quarters (73%) of global institutional investors are most optimistic about private equity in 2025, a significant rise from 60% last year. This is likely to grow further, as 78% of respondents believe rate cuts will boost deal flow in private markets. Meanwhile, 73% expect more private debt issuance in 2025 to meet borrowers’ rising demand.
Regarding private investments, over half (54%) report increasing allocations to private markets. Overall, 65% of respondents are exploring new areas of interest, such as opportunities related to artificial intelligence.
Active management to thrive
70% of institutional investors believe that markets will favour active management in 2025. Nearly seven in ten (67%) say their actively managed investments outperformed benchmarks in the past 12 months.
Given the shifting interest rate and credit environment, institutions are likely to benefit from active investing. Seven in ten state that active management is essential for fixed-income investments.
