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Significant Changes In Allocation Unlikely

The market scenario projected for 2023 may look vastly different from what institutions have experienced in the past decade, but few anticipate it leading to significant changes in allocation strategy, says Natixis Investment Managers in its ‘2023 Outlook Survey.’ In fact, survey results show that on average, institutional allocations will shift no more than one per cent in any given asset class. But while there is little planned in the way of large allocation shifts, many anticipate significant adjustments within asset classes to position portfolios for the year ahead. In fixed income, rising interest rates are making bonds attractive again. Few believe bankers are done raising rates. In fact, 54 per cent of those surveyed project rate hikes will continue in 2023 – a number that is significantly higher than the 20 per cent who see no hikes and the 26 per cent who think rates will be cut. With bonds well above the 10-year average, 60 per cent of institutions believe long-duration bonds will outperform in 2023 while 40 per cent are more convinced that short-duration will deliver. More than half (53 per cent) say recent yield shifts have led them to actively de-risk their portfolios, an outlook which carries through to their fixed income strategy. This flight to quality has the largest numbers of institutions looking to increase allocations to investment grade bonds and government bonds. Fewer plan to add credit-sensitive high yield (37 per cent), and emerging market bonds (29 per cent), while another eight per cent will trim securitized debt holdings. Despite the renewed interest in bonds, institutional investors see one potential drawback: liquidity. With the U.S. Fed and other central banks ending the asset purchase programs, 36 per cent of institutional investors cite liquidity as a key portfolio risk in 2023. It’s likely the worry here is twofold. There is concern that in the event asset owners need to sell off securities, there may not be a ready market of buyers. Second, it could also make price discovery harder for those looking to buy.

BoC Signals End To Hikes

The Bank of Canada (BoC) hiked its key interest rate by half a percentage point Wednesday to 4.25 per cent, the highest it’s been since January 2008. However, after its seventh consecutive increase since March, the central bank signaled it may pause its aggressive rate hike cycle. “Looking ahead, the governing council will be considering whether the policy interest rate needs to rise further to bring supply and demand into balance and return inflation to target,” it says. This is a marked departure from previous announcements where the bank said more rate hikes should be expected. The central bank has been raising interest rates rapidly to slow the economy and bring inflation down. However, now it says there’s “growing evidence” that higher interest rates are restraining demand in the economy.

For details on these stories, visit www.bpmmagazine.com

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